A whimper not a bang for the Tadawul

16 June 2015

The much anticipated opening of Saudi Arabia’s stock exchange is likely to underwhelm

Investors have been waiting for years for the Middle East’s largest and most liquid stock exchange, Saudi Arabia’s Tadawul, to open up to direct foreign investment.

That day has finally arrived, but in the short term, capital inflows are expected to be small and gradual.

This is thanks to the timing of the opening to qualified foreign investors (QFIs) and the strict regulations placed against foreign institutions planning to invest in the Saudi market.

The minimum assets under management of $5bn for QFIs will severely restrict the pool of potential institutional investors. It is unclear how many of these have attempted to qualify, or subsequently succeeded, but interest is bound to be high for such a large market.

Saudi Arabia has also chosen to open the market to QFIs just days before Ramadan begins, a time when trading slows as many people leave the region to spend summer in cooler climates.

Share values on the Tadawul have been depressed by lower oil prices and slowing GDP growth. Investors will be wondering how long the government will maintain spending to boost GDP through a projected long period of $60 oil.

The pipeline of initial public offerings has slowed, but may pick up with the stabilisation of oil prices. The effect of foreign capital should make listing more attractive for private companies.

The move can be seen in the context of a gradual liberalisation of Saudi Arabia’s economy, starting with the telecoms sector and moving to finance and insurance. It shows high level commitment for this liberalisation and encouraging private sector investment

Although the initial impact is likely to be very limited, the conservative kingdom may perceive a gradual measured change as in its best interests. It is also more likely to avoid the speculation and volatility Qatar and Dubai experienced as they were upgraded to MSCI status in 2014.

When, and if, Saudi Arabia is upgraded to emerging market status, a much bigger inflow of capital can be anticipated.

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