Saudi Arabia’s Tadawul Stock Market and Foreign Investment (AFC)

With Saudi Arabia planning to open its Tadawul stock market to foreign investors on June 15, 2015, Asia Frontier Capital’s CEO and fund Manager Thomas Hugger recently traveled to Riyadh with the most recent AFC newsletter containing a detailed country report as well as a trip report.

Despite it being the largest (US$590 billion) and most diverse stock exchange in the Arab world, Saudi Arabia’s Tadawul stock market has always been off-limits for direct investment from non-Saudi or non-GCC investors. Currently, foreign investors can only gain exposure to Saudi Arabia though P-Notes, equity swaps and a few Middle East focused ETFs. Access by institutional investors has been mostly through P-Notes, which received a boost when the Saudi Arabia’s Capital Markets Authority (CMA) approved and regulated them, but they never accounted for more than a tiny fraction of the market – probably 5% of total.

On April 16th, Saudi Arabia’s stock market regulator announced that the Tadawul would officially allow foreign investors to begin trading as of June 15, 2015. The intention is to open the market to attract foreign capital to help diversify Saudi Arabia’s economy away from oil, increase job creation for the country’s relatively young and consumer-focused population and spark better corporate governance and financial reporting standards to help Saudi companies broaden their reach and further expand into new markets.

MSCI has also announced that it will launch a standalone index for Saudi Arabian stocks starting on June 1st plus there is already an SEC filing for an iShares MSCI Saudi Arabia Capped ETF. However, retail investors should be aware of the following:

For AFC, the disappointing news regarding Saudi Arabia’s liberalization plan is that the country chose to adopt a Qualified Foreign Investor (QFI) scheme, similar to China, in which investor participation is limited to funds of a certain size (minimum AUM of USD 5 billion) and track record (minimum 5 years). While this specification likely will not impact large institutional managers, smaller, boutique investors like AFC are forced to remain on the sidelines until we meet the required size and track record requirements. Additionally, foreign ownership limits will mandate that foreign investors’ holdings cannot exceed 10% of the market’s value; with a limit of 5% for a single QFI’s holding in a particular stock and 20% for cumulative QFI holding of a stock.


From my experience, the in-depth classification process that MSCI adheres to is very important. Many investors think that the reason why a country is included in an index is solely based on the size and development (GDP per capita) of the country’s economy. However, based on our research at AFC, one of the most important factors for MSCI to consider when deciding on a country’s potential inclusion in a certain index is the accessibility of the country’s stock market to foreign investors. It is for this reason that I think some observers may be disappointed in 2016 when MSCI announces its classification decision, as it is certainly possible that Saudi Arabia will be included in the MSCI Frontier Index and not in the MSCI Emerging Market Index.

To read the AFC Country Report: Saudi Arabia and AFC Travel Report: Saudi Arabia, go to the website of Asia Frontier Capital.Investors looking for exposure to the entire region should also check out our Middle East ADR lists, Middle East ETF lists and Middle East closed-end funds lists.

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