Saudi Arabia, the largest Arab bourse, opens up to foreign investors

Nadine Hawa for CNBC, September 2008

Since a market crash in 2006 saw the Saudi market shed 60% of its value, the kingdom’s Capital Markets Authority (CMA) has been on a quest to reinvent itself. It recently introduced a new set of guidelines aimed at gaining more institutional investors, and improving transparency at the Saudi bourse which is dominated by day traders.

After a wave of reforms, the largest Arab market has finally opened up to foreign investors in a ground breaking move which has been long anticipated.

The Saudi market has a $450 billion market capitalization, and boasts the largest number of blue chip companies in the Middle East. It is the largest bourse in the Gulf Arab region, and represents just under half of the total market cap of all other GCC markets combined.

Despite its advantage in size, the TASI (Tadawul All Share Index) has been the worst performing benchmark this year, down a whopping 35% year to date.

The announcement of what has been labeled by some as a historic resolution couldn’t have come at a better time. It triggered the index to jump by 5% on the first day of trading following the statement made by the CMA.

The index climbed from its all time low this year, at the 7800 levels on August 10th, to the 8900 levels upon introduction of the new rule on August 23rd.

Although a set of reforms has been introduced at the Saudi market in recent months, the fact that the market was now open to foreigners through access products topped the list of developments.

Foreign investors will be able to trade in Saudi stocks indirectly, through authorized local firms. More specifically, they will be able to do so through contractual swap agreements. These swaps will earn investors the usual monetary rewards and economic benefits such as capital appreciation, splits, and dividends.

The Swap agreements will last a maximum of four years, and the CMA has set no limits on foreign stock ownership.

However, the new rule does not come without limitations. Local firms will retain legal ownership of the shares, and foreign investors will lack voting rights.

US financial giant Morgan Stanley was the first to take the plunge through its Saudi subsidiary, Morgan Stanley Saudi Arabia (MSSA). MSSA was the first to enter into a swap transaction with a non-resident foreign investor for a single stock.

Soon after, another leading investment firm, Deutsche Bank, followed suit through their Saudi subsidiary, Deutsche Securities Saudi Arabia.

The Saudi Capital Market Authority says it expects to see growing interest in these swaps in the coming few years from investors all over the world.

This might just be the beginning of an even greater affair. John Sfakianakis, Chief Economist at the Saudi Arabia British Bank (HSBC’s Saudi affiliate) said it best when he told CNBC that this could be one step away from the Saudi market opening up completely to foreign investors.