There are few places left in the world that are off limits for US investors, and the Kingdom of Saudi Arabia announced this week that it can no longer be counted as one of them. The announcement that foreign investors will be allowed to invest directly in the $530 billion market starting sometime next year rocked financial headlines and was trumpeted as a major move forward for progressiveness in the Kingdom.
The size of the market is truly astounding. The size of the market is currently calculated to be $530 billion, an emerging market that would be second only to China in its size. Trading $2.2 billion shares a day, projections indicate that foreign investment will add an additional $50 billion into the economy. Even with an assumption of a 20% cap on foreign ownership, the size of the market open to foreign investors would be the size of Poland or Turkey.
What kind of opportunities would this open?
While Saudi Arabia is most famous for its oil reserves and the wealth that comes from them, part of the push for foreign investors is to move away from its oil base and pump new capital into its other industries.
One of the biggest companies to benefit from the injection of capital is the Saudi Basic Industries Corporation, or SABIC. This diversified chemical company is the second largest in the world, does $50.4 billion in sales in 2014 and has a market value of $94.4 billion. The company's primary investor, the Saudi government, owns 70% of the shares and while it would retain its position as largest shareholder, would still release a generous amount into the market allowing investors to take advantage of the company's solid reputation and global production and delivery networks.
For investors interested in Financials, fans of Warren Buffett's Berkshire Hathaway (BRK.A, BRK.B) would find themselves in familiar territory with the ability to purchase shares in Kingdom Holding Company, an investing and private equity group headed by Prince Al-Waleed bin Talal. With investments from Twitter to real estate and a market value of $22.2 billion, this company could provide excellent diversification to complement an existing holding in Berkshire or Markel.
It's not just major, high-profile companies that stand to benefit from the influx of cash. Investors will have access to smaller companies. Telecoms such as Saudi Telecom Company, the $35.6 billion company that in 16 years, has spread from being a regional telecom company to serving 160 million customers in the middle east, Asia and parts of South Africa, and shows the solidness of companies located in KSA.
What this means for Investors
While this may seem like an exciting development for investors, you may want to hold off on those Arabic classes and asking me to explain the intricacies of Islamic finance. Though this would be the first time that foreign investors would be allowed to directly purchase stocks listed on the Tadawul exchange (though foreigners have been allowed to participate in swaps since 2008), the Capital Markets Authority has some restrictions. Investors would have to apply for licenses with the qualifications including $5 billion assets under management globally, with each license holder only able to purchase 5% of a company, and only 20% total foreign ownership of a company. While the Capital Markets Authority has not announced how many of these licenses will be available on opening day, recent estimates project that it will be a small sampling with more licenses granted over time. With restrictions like these, the big winners will be major banks with established EMEA departments, such as Deutsche Bank, HSBC, and Goldman Sachs.
While this development has major implications for big banks and global markets, there is no real good play for the average investor from the opening of Saudi Arabia's markets. This may change with time as more licenses are granted, but it seems like next year will be celebrated by a privileged few. Unless you happen to be the manager of a major EMEA trading division, it may be best to look elsewhere for value.
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