Saudi Arabia’s decision to open up its stock market (Tadawul) to foreign investors is a significant step forward for both the kingdom and the wider Gulf region. It will trigger a surge in foreign investment inflows and establish the Gulf as a key market to add to any international investor’s portfolio.

The Tadawul is highly attractive to foreign investors. It is capitalised at about $530bn and companies listed on it include Saudi Basic Industries Corporation, one of the largest chemicals firms in the world. The exchange is currently very buoyant, with the Tadawul All Share Index up by 46 per cent over the past two years.

The kingdom’s positive macroeconomic indicators will further fuel investor interest in the exchange. The Washington-based IMF forecasts GDP to grow at 4.6 per cent in 2014, higher than last year’s growth figures. High oil prices continue to fuel large fiscal and external surpluses.

The potential for growth in Saudi Arabia puts it on a par with other emerging markets, but in contrast to many emerging markets, it benefits from a stable government and low sovereign credit risk. The anticipated interest in the Tadawul is also expected to draw further investor interest in other Gulf markets, such as Dubai, Doha and Abu Dhabi.

The opening up of the Saudi market could also position it for inclusion in the US-based MSCI’s emerging markets index, drawing in additional investment. The UAE and Qatar were upgraded from frontier to emerging market status earlier this year.  

Saudi Arabia, however, is unlikely to get carried away with the excitement of opening up its market. Riyadh tends to move slowly and cautiously with reform, and is expected to place strict limits on foreign ownership and ban investment in certain sectors.  

But despite restrictions, foreign investors remain eager to find out how they can tap this rich and previously inaccessible exchange.