Much has been made of the news that Saudi Arabia’s stock market (the Tadawul, as it is known) is set to welcome direct foreign investment from early next year.
With a market cap of over $0.5 trillion, the Tadawul is the largest bourse in the region. It is over twice the size of both Dubai and Abu Dhabi combined, and is worth more than all of the companies listed in Egypt, Qatar and the UAE.
Some of Saudi’s blue chips are global brands in their own right; the likes of SABIC, Saudi Telecom, Al Rajhi Bank and Kingdom Holding would make tempting additions to any share portfolio.
Tadawul to be listed on MSCI index?
In addition to its size, the Tadawul’s liquidity also exceeds its neighbors – the daily average turnover in 2014 was over $2 billion, just under three times the daily trading in Abu Dhabi and Dubai.
Most importantly for investors, Saudi companies have much lower price-earnings (P/E) ratios than their peers across the Gulf – for example, SABIC’s P/E ratio is a multiple of 16, and the average for the market as a whole is a multiple of 18. It could be argued that the value offered by Saudi’s publicly listed companies exceeds that of stock exchanges across the rest of the Gulf.
Once the Saudi bourse is open to foreigners, the country’s stock market regulator will then be able to apply for the Tadawul’s listing on the MSCI frontier markets or MSCI emerging markets indices. The inclusion of the Abu Dhabi, Dubai and Qatar financial markets in the MSCI’s emerging markets basket earlier this year gave the three stock markets a significant trading boost.
Day traders not wanted
When considering the country’s expected growth this year – the International Monetary Fund (IMF) estimates Saudi’s economy will grow at 4.6 percent this year – it seems that there’s little to dislike about the Saudi Tadawul.
However, details on how foreigners can invest directly in the Saudi bourse are still being worked out. Today, foreigners can only trade indirectly, through derivatives and investment funds.
While there has been little indication yet as to how foreigners will be able to invest, media reports suggest that the Saudi authorities would allow qualified foreign institutional investors with a minimum of $5 billion of assets under management and over a period of five years. In essence, analysts suggest that the Kingdom’s regulator wants stable, long-term foreign investors rather than day traders.
Investment opportunities welcomed
Over the coming months, expect more announcements coming out of Riyadh as to what shape direct foreign investment into the country’s stock market will take.
Whatever the route taken, any foreign investment will help to further drive not just stock valuations but also longer-term stability in trading volumes. The diversity of companies listed on the Saudi stock market, the strength of the local and regional economy and the maturity of the regulatory environment in the Kingdom all mean that any opportunity to invest in Saudi Arabia by foreigners will be warmly welcomed.
The only question remaining is – how long do we have to wait?
Alex Malouf has been a journalist, writer and columnist in the Gulf for over a decade. He speaks both Arabic and English and has lived in Bahrain, Jordan, Lebanon, Saudi Arabia and the UAE. He blogs at alexofarabia.com.