Foreign fund managers can finally access individual Saudi stocks – or at least the economic benefit of the stocks, which is what interests them. What does this show about the Saudi stock exchange? Is the Tadawul about to become a more natural market, moved by investor sentiment related primarily to expectations of corporate earnings growth?
Allowing foreigners access to Saudi shares should lead to a less volatile market, because more of those involved will be primarily institutional investors. Bankers in Saudi Arabia have argued this for years. A greater involvement of institutional investors will demand more, and better, research. Retail investors, which will continue to dominate the market, will also benefit from the move, as they will find a clearer, more rational price guide.
But the timing, in late August, of the announcement that foreign investors could take exposure to individual equities through swaps is slightly worrying. It suggests that the capital markets reform process in Saudi Arabia is more a reaction to events than structured.
Just a week before, the Saudi Capital Markets Authority began revealing the identities of investors with a stake of more than 5% of any company: an important move towards better transparency.