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Saudi market opening for direct access a further boost to MENA

Following a cabinet approval, the largest equity market in the MENA region, the Kingdom of Saudi Arabia, should soon become open for direct foreign investments. The long-awaited move would finally come to pass once the Capital Market Authority (CMA) formalizes the timing and guidelines, with the issuance of the latter within 30 days, followed by a consultation period of 90 days and likely opening of the market during the first half of 2015.

"The opening of the Saudi stock market would be a major positive for the MENA region, with a total market capitalization of 1.2 trillion USD, where Saudi Arabia alone accounts for 45 percent and where regional liquidity is around 4 billion USD of which Saudi Arabia represents 65 percent. With over 160 listed securities the kingdom's stock market offers a diversified sector base", said Aleksandar Stojanovski, research analyst at Deutsche Bank.

Saudi equities are currently accessible only via synthetic products for foreign investors and estimates see less than 1% foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for around 8 percent. "After an opening of the Saudi market and assuming foreign ownership reaches a similar level to the regional equity markets we could see up to around 35 billion USD of incremental foreign inflow versus the approximately 4 billion USD that foreigners have accumulated since 2009, when indirect ownership first became available", said Stojanovski.

Saudi Arabia is the most liquid market in the region, with a 6 months average daily trading volume (ADTV) of 2.5 billion USD, accounting for 65 percent of the regional liquidity. Foreign investors – via indirect routes – currently trade only 1.1% versus the regional average of 12.2 percent. Assuming the share of trades by foreign investors reach the regional average levels, there is potential for a marginal 11 percent growth in Saudi Arabia’s liquidity, with ADTV levels reaching 2.7 billion USD. Yet, the 300 million USD of potential foreign incremental liquidity in Saudi Arabia could be a significant boost to the 145 million USD that foreigners currently trade in regional markets on a daily basis.

"With the direct trading restriction by foreign investors removed, we believe that the prospect of Saudi Arabia joining MSCI Emerging Markets becomes a reality, albeit unlikely before 2017. If promoted, we estimate the weight of Saudi Arabia in the EM index to be 1.9 percent, using GCC country weights in the MSCI GCC index as a proxy. While the incremental fund inflows due to eventual MSCI EM promotion could reach up to 10 billion USD", Stojanovski concluded. The combined weight of the MENA region could then rise to around 3 percent, from its current 1 percent, putting the region ahead of countries like Indonesia and Thailand. This year, UAE and Qatar joined the Emerging Markets index with weights of 0.58 percent and 0.47 percent, respectively.