Saudi Arabia's plan to open its stock market to direct foreign investment in the first half of 2015 could increase foreign exposure to the market to $35 billion (â¬26 billion).
The estimate, which assumes levels of foreign equity ownership in Saudi Arabia will become comparable to other markets in the Gulf region, comes from Deutsche Bank analyst Aleksandar Stojanovski.
This figure includes the roughly $4 billion that foreign investors have accumulated since 2009, when indirect ownership of Saudi stocks by foreign investors first became possible.
"The opening of the Saudi stock market would be a major positive for the Middle East and North Africa region, with a total market capitalisation of $1.2 trillion, where Saudi Arabia alone accounts for 45%," says Stojanovski.
The Saudi regulator, the Capital Market Authority, says it will aim to publish draft rules for the opening up of the country's stock market, known as the Tadawul, next month, after which they will be subject to a 90-day review.
Investors will be curious to see if the CMA imposes caps on foreign ownership and what criteria are needed to qualify as a foreign investor – one guess is that the CMA will require investors to have more than $5 billion under management and a track record of several years of stable investing, to limit volatility brought by the influx of foreign investors.
The CMA will also have to address the problem of the country's T+0 settlement cycle, in which trades are executed and settled on the same day. Most global markets operate a T+2 or T+3 cycle and, for international investors to participate in the market, some kind of workaround solution must be found, in which sub-custodians in the country either pre-fund securities trades or establish credit limits with local brokers.
Despite these obstacles, regional investors and fund managers were galvanised by the surprise announcement from the Saudi authorities, which came just before holidays for the Muslim festival of Eid.
"It's the biggest thing to happen to the regional equity markets for a decade plus," says Khalid Murgian, managing director, Neuberger Berman, who is based in Dubai.
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