Capital Market

Foreign investment in Saudi stock market up by 150%

Marmore Team

06 September 2021

It is reported that the foreign investment in the Kingdom's stock market increased by more than 150 percent by the end of Q2 2021, compared to late 2018. Banking, basic materials, energy and communications attracted the most foreign investment. This can be attributed to the Saudi Arabia’s efforts to develop the financial market and expand the institutional investment base. The value of foreign investment in Saudi Stock Market was USD 73.6 billion in 2021Q2 comprising mainly of Qualified Foreign Investors (QFI) investment of USD 57.7 billion, Strategic Partners of USD 13.3 billion, foreign residents of USD 2.1 billion, SWAP Holders of USD 0.6 billion and negligible amount (USD 5 million) from foreign Discretionary Portfolios under Management (DPMs).

The government of Saudi Arabia decided to open its stock markets to foreign investors some years back in 2015. The government of Saudi Arabia took this action to deal with two major issues in relation to their national stock exchange. The hope that in allowing more participants, it will assist in reducing the excessive volatility that exists in the market. Also, to help with better corporate financial policies of companies that are traded in the exchange. Several mostly family owned businesses were short on transparency and the best business practices. An additional benefit to Saudi Arabia, was the infusion of the equivalent of billions of foreign investment to the domestic economy as part of the larger goals of Vision 2030 to strengthen resources for domestic investment opportunities in the Kingdom and free it from the impacts of oil price volatility.

The Capital Market Authority through The Financial Sector Development Program, has made measures to raise the attractiveness of the Saudi financial market and enhance the entry of foreign investors directly or indirectly, starting by allowing foreign resident investors to invest in the Saudi stock market directly, allowing foreign investors to enter the Saudi stock market through swap agreements, allowing qualified foreign investors to invest in listed securities, allowing foreign strategic investors to own strategic stakes in listed companies, and allowing foreign investors to directly invest in debt instruments.

As per the relaxed norms The Saudi Stock Exchange, or Tadawul, permits established institutional foreign investors, not individual investors (except in the Parallel or Nomu market), to trade. A qualified foreign investor, for the purposes of the Saudi exchange, has at least $5 billion in assets under management and has been in business for at least five years. Investors who aren't billionaires can invest more modest amounts in Saudi Arabia through any of a handful of exchange-traded funds (ETFs) that focus on the region. Saudi Stock Exchange is included in MSCI Index (2.59% weight), FTSE Russell (3.76% weight) and S & P Index (2.83% weight) since 2018.

In addition to restrictions on individual investors , there continues to be other limits to direct investment in Saudi companies such as (a) A foreign investor may own no more than 5% of the shares issued in any one company(b) All foreign investors (resident or non-resident) may collectively own no more than 49% percent of any company's shares and (c) All qualified foreign investors collectively are limited to 20% of a single company's shares and 10% of all of the shares of all of the companies listed on the exchange.

It therefore remains to be seen whether the authorities will introduce more relaxations to enable the Saudi Stock Market to become a true international market that can attract global flows in a big way.

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