Business & Money | Tuesday 16 June, 2015 5:16 am |

One of the most eagerly awaited economic reforms in the region in recent times, the opening of the Saudi Arabia stock market to qualified foreign investors, has finally arrived with the opening bell of Tadawul on June 15th.

Asset managers are unanimous in their belief that this move by the Saudi Capital Market Authority (CMA) could attract as much as US$40 billion of inflows into the Saudi bourse over the next three years upon the MSCI upgrade to emerging market status, and multiplications thereafter.

Hasan Al Jabri, CEO of SEDCO Capital said: “The opening of the market comes as part of a continuing policy to deepen the equity market and broaden the investor base. Over the last decade, the Saudi Capital Market Authority has pursued several steps to make the Saudi market attractive to foreign investors, including aligning working days with other regional and international markets, improving corporate governance standards and disclosure norms by making quarterly earning disclosures mandatory for listed companies. Today, Saudi Arabia's regulator, the Capital Market Authority is amongst the most respected in the Middle East and has clamped-down on several occasions to ensure market participants comply with listing and reporting regulations.”

The Kingdom’s commitment to domestic spending and development, and an earnest interest in job creation creates favourable tailwinds for consumer-focused stocks in particular. These are similar to options in mature African or Asian markets, but will undoubtedly prove more attractive because of Saudi Arabia’s favourable demographics, and lower regulatory risks. The pillars that define the unique positioning of the Saudi stock market are material size, ample liquidity, robust economic fundamentals, lack of currency risk and evolving regulatory environment for the capital market.

Yazan M. Abdeen, Lead MENA Fund Manager & Head of MENA Liquid Assets at SEDCO Capital explains why the appeal of the Saudi market is equally immense and irresistible: “Saudi Arabia has simply put itself at the centre of the global investment scene with its opening to foreign investors. The interest in the Saudi stock market will build up to become enormous over the course of the coming two years as Tadawul makes its way into an emerging market status, due to the country’s strong economy and growing capital markets. This will also allow Tadawul to be targeted by large pools of global institutional investors who will predominately reduce the effects of the dominance of retail investors in the Saudi market which will trigger lower market volatility. The significance of the market, combined with a lack of currency risk, will enforce emerging market managers (both active and passive) to give more allocation to Saudi Arabia.”

“Investing in Saudi Arabia does not mean confinement to the energy sector, with not a single oil company listed, with time we will see that more will be done to encourage firms to focus more on tradable rather than non-tradable production in the non-oil sector. Although petro-chemical businesses have correlations with oil, they have less volatile earning streams and are exceptionally profitable when compared to other chemical businesses in other markets in the given low oil price environment as their competitive advantage in feedstock rise. Local investors in the Saudi market are positioned to benefit from the market institutionalization as it matures and selects its best breed asset managers that follow a fundamentally driven investment process to outperform the market and their peer,” he added.

Bernard Caralp, Chief Investment Officer at SEDCO Capital said, “The opening of Tadawul to qualified foreign investors will be more than just an inflow of liquidity as it will give international investors direct access to the Middle East’s biggest economies, with listings of some of its largest companies across industry sectors, and to this extent, they will be able to access a stock market that is more representative of the real economy than many of its regional peers.”

“In a domestic context, qualified foreign investors will help the Saudi stock market improve its functioning in several ways as local companies will be exposed to a much needed market discipline and support for their intrinsic growth, given the intended diversification of the country’s petrodollar-dependent economy. Long term investors will also reap the benefits of a greater institutionalization of the market which will reduce volatility and speculation in the market resulting in a larger share of long term savings being allocated to the equity markets,” he added.

According to SEDCO Capital, Saudi Arabia’s stock market “Tadawul” happens to be the largest in the Middle East with164 listed companies and a market capitalisation of $580 billion, equivalent to two thirds of Saudi GDP. Saudi Arabia’s market size is individually bigger than South Africa, Russia, Mexico and Turkey. It makes up 6.4% of the global Emerging Market's capitalization, which stands at $8.3 Trillion. Furthermore, the Saudi market trades more than $2.4 billion in daily value compared to the $18.2 billion traded in all of emerging markets on daily basis representing 13% of emerging markets liquidity.