Saudi Stock Market

Article1 : Saudi Arabia Stock Market Opens to Foreigners

Columnist : Brad Bourland Chief Economist,

Saudi American Bank

In early November the Saudi Finance Minister announced that

foreigners, whether resident in Saudi Arabia or not, could now invest in

the Kingdom's stock market through purchase and sale of mutual funds

that trade in Saudi stocks. Before this, the only option available to

foreigners who wanted to invest in Saudi stocks was a single closed-end

mutual fund, the Saudi Arabia Investment Fund (SAIF), traded in

London. As a "closed-end" fund, SAIF limited foreign money in the

Saudi market to the $250 million initial size of the fund when launched in

1997.

The combination of this news, the continued strength of oil prices, and

the drumbeat of economic reforms being announced in Riyadh, has

given a strong boost to the Saudi market. Before the Minister's

announcement, the market had already moved up about 20 percent for

the year so far. Since the announcement, the market has added another

10 percent gain so the market at this writing is up over 30 percent in

1999. Volumes of trading have also grown. Through mid-November,

days when 6 million shares have traded have been common, whereas

the averages trading day was under a million shares for the first half of

the year.

The market reaction is not yet as a result of foreign money flowing into

the market, although the banks were allowed to immediately start selling

to foreigners and some have begun to do so. Rather, the rise is a result

of Saudi investor confidence and anticipation of the impact of the inflow

of foreign money.

But will foreigners invest in Saudi stocks? The answer is a resounding,

"yes". Even in a world where it is still much easier for the smallest

investor anywhere to buy shares of Microsoft than to buy Sabic, still

there are many pockets of foreign money that will invest in the Saudi

market.

First, many of the 6 million expatriates who live in Saudi Arabia and

work for the very companies listed on the exchange will invest. Many

foreign residents of Saudi Arabia have lived here for decades and would

welcome a chance to buy stocks here. They know the companies well,

know the markets and the economy well, and already have accounts at

the banks that offer the mutual funds.

Second, foreign institutional investors, such as pension funds and

foreign mutual funds that invest in emerging markets and have billions of

dollars in assets under management, will invest more in the Saudi

market. Most of these institutional investors track their performance

against an index, such as the Morgan Stanley Capital Index (MSCI), or,

the International Finance Corporation Global Index (IFCGI). The Saudi

stock market now represents 2.5 percent of the IFCI, so any fund

manager that tracks the IFCGI would have to have 2.5 percent of his

assets invested in the Saudi market to be "evenly weighted" in Saudi

Arabia against his benchmark. The MSCI is the much more common

index used as a benchmark for large institutional investors, and Saudi

Arabia will not be included in that index until foreigners