Saudi Arabia market opening: A potential boost to EM

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By Jan Dehn, head of Research at Ashmore discusses the opening of Saudi Arabia’s stock market to foreign institutions and how this will benefit investors.

“Following on from last year’s declaration of intent, the Saudi capital markets regulator has now formally announced that the $535bn Saudi Arabian stock market will open its doors to qualified foreign institutions on 15 June 2015. Saudi Arabia’s stock market is larger than the stock markets in Mexico, Indonesia, Malaysia and Russia. Technicals are strong and valuations are likely to re-rate higher over several stages, particularly when the market is included in the main benchmark indices. Fundamentally, the market offers attractive exposure to petro-chemicals and consumer stocks with the latter strongly supported by counter-cyclical policies recently announced by the government.

“Draft regulations were released for consultation in August 2014; they suggest a 10% cap on aggregate foreign ownership and limits access to investors with at least USD 5bn in assets under management and a minimum of five years of investment experience.

“Saudi Arabia is a very large, liquid market. It will potentially be the seventh largest Emerging Markets (EM) equity market by market capitalisation, which places it just behind South Africa ($543bn), but ahead of Russia, Malaysia, Mexico and Indonesia. The Saudi Tadawul Exchange trades on average $2.4bn per day across 162 listed companies and offers a rich selection of opportunities ranging from banks to consumer-driven businesses.

“The opening of the Saudi market will widen the foreign investor base, which is currently less than 1% of total holdings. Given the size and depth of the market, we expect Saudi Arabia to be included in the main EM equity benchmark indices by mid-2017, though this requires the authorities to further lift restrictions on access to the market. Should this happen, billions of Dollars will flow into Saudi Arabia over the next few years, in our view. Judging by other precedents in the region, such as Morocco, Egypt, UAE and Qatar, Saudi Arabia’s market is likely to re-rate when it becomes included in EM indices. Indeed, we see analogies to the opening of the Indian market for foreign equity investors and the on-going opening of the onshore Chinese stock markets.

“Saudi Arabia’s decision to open its markets now is highly intelligent – global financial conditions are bound to become tighter in the coming years and the winners among EM countries will be those that are able to maintain or increase their share of a shrinking global ‘financial pie’.

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