Many will find it a bit of a mystery that Saudi Equities still do not form part of the most important international benchmarks. Despite solid macro-economic credentials, a market that has outperformed Emerging and Global Equities for the past 20 years is still kept out by major index providers. If you buy a global equities ETF or index fund today, whether it has exposure to Emerging Markets, Developed Markets or otherwise, the chances are that you will have no direct investment in Saudi Arabia.
This can seem somewhat odd as the Saudi market has a number of things going for it. It is large, representing between 40 and 60% of the total available market capitalisation in the region depending on index methodology. It is also liquid with an average daily volume above 1 billion dollars over the past year, although this is a number that used to be significantly higher in previous years. It also counts some of the most important companies in the region: of the top 20 regional companies, 13 are from Saudi Arabia. Any investor seeking to find diversification opportunities by going global should seriously consider including this market in their investment universe.
However, index providers have previously been held back by accessibility issues because of significant restrictions on foreign investors. Although it was possible to find a way into the Saudi market via derivatives so gaining exposure, little progress was made on direct access until the Capital Market Authority decided to introduce the Qualified Foreign Investor programme in 2015. Even then, there were a number of specific criteria to fulfil before an institution could gain full access to the cash market. At that stage, things were certainly moving in the right direction even if the process could be overly bureaucratic. But that was only a starting point. Since then, many criteria have relaxed and a new version of the rules launched in September 2016. Many investors saw this move as giving a really positive signal.
In the meantime, momentum for greater access has kept going on other fronts. First, there was an upgrade at the technical level. Improvements such as the introduction of a T+2 settlement cycle, and the implementation of a state-of-the-art Delivery Versus Payment system, are part of that effort. Second, the announcement of the possible listing of Saudi Aramco, potentially the world’s largest listed company, has captured international investors’ attention. Even without the listing of the national Energy champion, Saudi Arabia could potentially represent about 2.5% of the MSCI EM global index. Aramco would boost that number even more and make it a much harder market for most investors to ignore. Almost as importantly, it would raise the international profile of Saudi Arabia and show that the reform plan is gaining traction.