The Big One: Saudi Arabia Sells Stocks to Foreigners

It's Riyadh or bust, baby.

The never-ending chase for better investment returns brings us to the doorstep of Saudi Arabia. The country remains an enigmatic mix of integration and isolation with the world economy. For instance, the same government that now funds one of the premier research institutions in the region, the King Abdullah University of Science and Technology (KAUST), has long paid what is in effect hush money to fundamentalist educational groups which have helped radicalize impressionable youths the world over. Or, the same country that is a G-20 member does not allow women to drive cars.

One of the restraints Saudi Arabia has kept is barring foreigners from buying stocks listed in the country directly. Sure you could acquire exposure to this market through mutual funds and ETFs, but not by purchasing stocks outright. However, market forces could not be curtailed forever as Saudi authorities are now finalizing plans to allow stock sales to foreigners. In terms of market capitalization, there really is no contest as far as the Middle East is concerned:

Saudi Arabia’s Capital Market Authority (CMA) said in July that it will open its $560 billion stock market to foreign financial institutions in the first half of next year. The announcement (which can be found here, but you may want to use Google Translate if your Arabic is as rusty as mine) spurred investors’ enthusiasm.

“This move by Saudi Arabia could be one of the most important catalysts for attracting significant flows of global institutional capital into this region,” said Zak Hydari, CEO of European Islamic Investment Bank-Rasmala, which manages more than $1.1 billion of assets in the Middle East. “The size and liquidity of the Saudi market, coupled with the strong regulatory framework of the CMA, will be extremely appealing to global investors, who have been waiting a long time for such a development to take place. It could be a real game changer for the region's investment and capital markets,” noted Hydari.

The stock market of Saudi Arabia, the world’s largest oil producer, stands out for its size and breadth. In comparison, Dubai and Qatar—which have been attracting attention in the past couple of years and have been promoted to emerging (from frontier) markets status on the MSCI index by Morgan Stanley—are much smaller. Dubai has a market cap of $101 billion; Qatar, $191 billion.

Make no mistake: the Tadaqul is probably the world's largest stock exchange that remains unopened to foreign investment. Consider it alongside those of other emerging markets...

“To put that in context, [the Saudi market is] just under 10% [of] the size of the Nasdaq, half the size of South Africa's stock exchange and more than twice the size of Israel's market,” said Shane Leonard at Stockflare (www.stockflare.com), an investment blog. “Saudi stocks have the potential to become a major part of the MSCI Frontier Indexes, which could drive significant foreign interest in the Tadawul,” said Leonard. “Though the devil will be in the details, and retail investors shouldn't expect to be able to buy Saudi shares directly, as there may be a requirement to be a large long-term investor.”

The Tadawul All Share Index has appreciated a healthy 20% since the beginning of the year, compared with a nearly 6% rise in the MSCI Emerging Markets Index and 7% in the MSCI GCC Countries Index.

The logic of capital marches on--what David Harvey would call a "spatial fix."