Rumors that Tadawul would open to foreign investors swirled for years before they will be realized when the market opens in June 2015 but the opening is modest based on the maximum foreign investor ownership limits. Compared to many emerging markets, the amount available to foreign investors is modest (at 10% of the market value or about half the emerging market average) and only about two-thirds of the new investments are likely to be real ‘new’ foreign investors since estimates cited by Reuters are around 3% of the market. Many of the existing investors who go in through swaps or exchange-traded funds will just swap their indirect holdings for direct holdings to avoid costs, particularly if they anticipate the market will open further in years to come.
Yes, Tadawul is technically a frontier market but is much larger than most frontier markets and will likely get upgraded relatively quickly so emerging markets would be a better comparable. The impact of an eventual upgrade is likely to be particularly significant in that global investors often view the GCC together and Saudi Arabia’s inclusion in the Emerging Markets indices allow for direct exposure into Saudi Arabia, UAE and Qatar, which represents a better proxy for the region as a whole than just the latter two. The share of regional GDP (as of 2013) accounted for by Saudi Arabia is 45.6% which is more than the UAE and Qatar, the next two largest economies, combined.
|Minimum AUM for foreign institutions||$5 billion ($3bn with CMA approval)|
|Ownership cap||Single investor, single company||5%|
|All foreign investors, single company||20%|
|All foreign investors, whole market||10%|
Beyond just opening the largest markets, the addition of Tadawul brings into the mix one of the larger (by population) countries which has been trying to develop a domestic venture capital industry and is using both government/academic led initiatives like the New Ventures and Entrepreneurship program at KAUST and incubators within Saudi Telecom and Saudi Aramco, in addition to private sector venture capital (from both within and from outside of Saudi Arabia). These types of initiatives can take a long time to develop, but one of the needs that is demanded long-term to provide a successful exit route for venture capital successes. The long-term growth in the market will be driven by the ability to not just develop a trading market for the largest government-owned and private companies, but provide a venue for listing smaller companies.
Given the existing constraints (high retail trading share, relatively limited investment research and corporate governance weaknesses) that would constrain a more liquid, less volatile market developing, it makes sense to attract foreign institutional investors first to address these weaknesses. As difficult as some of these challenges may be, they will be easier to overcome than it would be to go straight into developing a market for smaller IPOs without addressing the lack of research and institutional investor participation and governance issues. The ‘modest’ foreign ownership cap shows an incremental approach to opening the Saudi capital markets and, while that may create some detractors, it is the first step on what has to be an incremental development process for developing the capital markets and other important parts of the financial and entrepreneurial ecosystem that will work alongside it to accomplish the ‘real’ goal which is boosting domestic employment opportunities and economic diversification.