The Tadawul All Shares Index (TASI) fell by 0.2 per cent in the first hour of trading, as the Saudi Stock Exchange (Tadawul) opened to direct foreign investment for the first time on 15 June.

This marignal decline to 9622 followed a 1.3 per cent gain for the TASI to 9645 on 14 June, but a fall in trading activity and the TASI over the preceding month.

“We would expect to see further weakness in the short term,” says Fahd Iqbal, Middle East head of research for Zurich-based Credit Suisse. “The TASI has risen in the last three to six month but come off a little in the last few weeks. The market may well bounce in the next few days but beyond that we would expect the Tadawul to weaken, perhaps as low as 9,000.”

Analysts had warned that inflows of foreign capital would be gradual and limited, especially as the Tadawul is seen as comparatively expensive.

“It will be a trickle not a flood,” says Zak Hydari, CEO of Dubai-based EIIB-Rasmala. “Nevertheless, the opening of the Saudi stock market is a game changer for the region. It will lead to greater capital flows from international investors and drive growth in the Saudi equity market, bringing more liquidity, greater market efficiency and promoting global best practices.”

This process is likely to be drawn out over several years, but as the largest, most liquid market in the region, investors will be looking seriously at the Tadawul.

Large international investment banks have shown a high level of interest and knowledge about the Saudi market over the last year. However, the Saudi Capital Market Authority (CMA) has not announced the names of any QFIs.

The CMA has also limited overall foreign ownership on the Tadawul to 10 per cent, with 20 per cent of each company. Institutional investors have to register as QFIs, and have over $5bn in total assets under management.

All these factors mean it is unlikely that investors will rush into the market. Very little impact on liquidity and trading volumes will be noticed in the short term. Local retail investors will continue to dominate the market, although as international institutional investors start to build portfolios, this will bring increased liquidity and stability.

“They [Saudi Arabia] are dipping their toes in the water,” says Iqbal. “They want to open up in a measured, controlled way, which doesn’t lead to a flood of hot money and destabilisation. These are the initial steps but in my opinion we will see the limits on QFIs and foreign ownership revised over time.”

Larger influxes of foreign capital are more likely when Saudi Arabia is upgraded to emerging market status by MSCI, as many institutional investors are restricted to indexes. Currently only those with flexible mandates, or frontier market focused funds can participate.

However, acheiving emerging market status will take at least two years, and depends on certain regulatory reforms and key stakeholder consultations.

Despite the market being expensive in comparison to emerging market and regional peers, QFIs will find some stocks attractive.

“We are very pro financials and the consumer sector,” says Iqbal. “Banks are benefitting from a rising interest rate cycle, especially with a large proportion of interest-free deposits. Consumer spending is well supported, and listings are trading at a discount to international peers. Petrochemicals will attract interest, although not so much until the oil price stabilises, we believe.”