Saudi Arabia, the oil-producing kingdom whose stock market has been off-limits to outsiders, will allow foreign investors to buy and sell shares next year as it seeks to lure capital to the $745 billion economy.
The country’s benchmark Tadawul All Share Index climbed to a six-year high after the Riyadh-based Capital Market Authority said today it will open the stock market to foreigners in 2015, and publish the rules for participation next month. Opening the market to international investors may prompt MSCI Inc. to classify the gauge as an emerging market, luring as much as $40 billion of foreign cash, according to Schroders Plc.
Saudi Arabia, the world’s biggest exporter of oil and de facto leader of OPEC, is removing barriers to one of the world’s most-restricted major stock exchanges as the government pursues a $130 billion spending plan to boost non-energy industries. King Abdullah, the 90-year-old monarch, has kept the economy expanding at an average rate of 6.4 percent in the past four years even as Middle Eastern neighbors from Egypt to Iraq grappled with political turmoil.
The Tadawul surged 2.8 percent to 10,025.14 at the close, the strongest level since May 2008.
“The big sleeping giant in the region is Saudi Arabia, a well-capitalized and large market that foreigners couldn’t get access to,” Gary Dugan, the chief investment officer at National Bank of Abu Dhabi PJSC, said by phone from Abu Dhabi. “It’s exciting. It gives greater credibility to the region.”
The CMA will seek feedback from investors and the public on the rules for 90 days and will review responses by the end of the year, it said in a statement on its website. Saudi’s exchange is currently limited to domestic investors and foreigners from the six-nation Gulf Cooperation Council. The kingdom is the Organization of Petroleum Exporting Countries’ biggest producer.
The move is a “giant step” toward inclusion in MSCI’s emerging-markets index, NBAD’s Dugan said. Saudi Arabia is the biggest stock market outside China, where domestic shares are excluded from MSCI’s global gauges because of limits on foreign investors, according to data compiled by Bloomberg. The kingdom is the
Saudi Arabia may be added to MSCI’s emerging-markets gauge by 2017 at the earliest, Sebastien Lieblich, executive director at MSCI Index Research, said by phone from Geneva today. The nation may account for about 4 percent of the index, he said.
“If you assume a neutral allocation to the market, and assuming the 4 percent that MSCI is guiding for, we will be talking about $40 billion” of foreign inflows in Saudi Arabia’s exchange, Dubai-based Rami Sidani, who oversees the $343 million Schroders International Selection Fund, said by telephone today.
The United Arab Emirates’ exchanges, along with Qatar’s, began trading as emerging markets last month after index provider MSCI reclassified them in June 2013.
“The move by Saudi Arabia helps accelerate efforts by the Gulf into becoming a more mainstream destination for international investors,” Ryan Huang, Singapore-based market strategist at IG Ltd., said by e-mail today. “Opening up the market will be a liquidity boost for Saudi corporations.”
Saudi Basic Industries Corp., the world’s biggest petrochemicals producer; Kingdom Holding Co., the investment vehicle of billionaire Prince Alwaleed bin Talal Al Saud; and Al Rajhi Bank, the largest Islamic lender, are all listed on the Tadawul. Sabic surged 6.7 percent to 123.35 riyals, the highest close since September 2008.
The Tadawul has rallied 17 percent so far this year, compared with a 7.1 percent advance in the MSCI Emerging Markets Index and a 15 percent increase in the MSCI GCC Countries Index.
The CMA drafted a proposed set of rules for international investors more than a year ago, requiring a minimum $5 billion of assets under management and a five-year operating history. The rules, designed to limit speculative inflows, would also cap investment in local companies, a person with knowledge of the matter said in May.
At least three banks, including HSBC Holdings Plc and Deutsche Bank AG, have executed test trades, three people said, asking not to be identified as the plans are private. Access for money managers outside the GCC has so far been limited to indirect routes, including equity swaps and exchange-traded funds.
Mark Mobius, who oversees more than $40 billion as the executive chairman of Templeton Emerging Markets Group, said in November his firm could double or triple its investment in Saudi Arabia if authorities allow direct foreign access.
The Saudi index trades at 14.8 times estimated earnings for the next 12 months, compared with 11.2 for the emerging-markets index and 15.1 for Dubai’s DFM General Index. Ten-day volatility in the Tadawul index tumbled to a decade low of 2.98 on July 17, data compiled by Bloomberg show, before rising to 15.6 today. By contrast, price swings in Dubai’s exchange rose to an almost five-year high in July.
Gross domestic product in Saudi Arabia will probably expand by 4.2 percent in 2014, versus 3.8 percent last year, economist estimates compiled by Bloomberg show.