Saudi Stock Markets: The Newest Toy In Town

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In a world bought and sold on credit, a number of strict Islamic laws that apply to lending money have kept a number of Middle Eastern states from delving into the 21st century economic market.  Classic restrictions on interest, dictating that all monies lent out may only be repaid in the same quantity, make everything from mortgages to bonds a rather sticky situation.  As such, it's major news that Saudi Arabia has opened up their economy to a stock market that, as of today, allows foreigners to trade the public debt of different companies from the Riyadh Stock Exchange where previously no outsiders could use the system.  While it won't rival the New York or London or Tokyo stock exchanges any time soon, there's a good deal of opportunity available to foreigners -- provided you meet some very strict criteria about joining the club.

Stock Scale

The first and most important factor of the launch of the Riyadh Stock Exchange to outsides lies in the scale.  While Saudi Arabia is not the only Middle Eastern nation with a vibrant stock market -- you can invest on the Damascus Exchange, provided you want to put your money into war-torn Syria -- they've got the biggest amount of money in play.  The total value of all shares on the Saudi exchange comes in at just under $600 billion, larger than either Mexico or Russia's stock markets; the NYSE, by comparison, owns a valuation of around sixteen trillion dollars.  That made it also, again by far, the largest market to have previously been unavailable to outside investment and the only member of the G20 restricting foreign access.  The Saudis have managed to keep their heads well above water as the lifeblood of their economy, oil, remains productive despite the massive drop in price during 2014.  The success of their business strategy has resonated through the Riyadh Stock Exchange: the Saudi All-Share Index (TASI) has climbed by fifteen percent in the past six months, a far better performance than either the Dow Jones Industrial or the S+P 500.  Despite the strong performance, the Saudis have been careful to maintain a rather exclusive club with comprehensive rules on who can and cannot join the party.

The Guest List

As with many other facets of Saudi society, where unwed women cannot leave the house without an escort and all foreigners must surrender their passports to enter the country, the requirements to trade on the Riyadh Exchange appear daunting.  All foreigners must invest in the central Capital Market Authority (similar to the United States' Securities and Exchange Commission) before they can begin to plunk down money on Saudi corporate debt.  An individual like you or myself cannot invest directly, unless we have accreditation as a hedge fund manager with at least five million dollars in assets to spend; banks and brokers may dip their toes in the water at a similarly hefty price tag.  Once you decide to put a few million dollars up for the offering, furthermore, you can only spend up to the point of 49% ownership of any corporate entity in order to discourage foreign interests over Saudi Arabia's economy.  If you don't have five million bucks burning a hole in your back pocket, smaller fish may get a piece of the action without registering as a qualified investment foreigner through a swap program.  Through this system, however, you get zero voting rights and less shareholder power than you would as a majority or minority investor with a western market.  With all the hoops that an investor need jump through, why bother putting your hard-earned cash on the Riyadh Exchange when there are so many alternatives?

The Argument For

The goal of opening the Saudi stock exchange to foreign investment came down to one factor above all else for the Riyadh authorities: limiting volatility.  Given that almost every Saudi corporation centers on energy in one form or another, commodity swings dictate the performance of stocks in a far more direct fashion than on the NYSE.  The Saudis need foreign investors to keep the market cyclical rather than dependent on oil and gas.  To do so, they've set up their exchange to promote consistency: while oil has dropped by some forty percent in the past twelve months, the structure of the Riyadh Exchange means that the overall index has lost only two percent in that same time frame.  While conservative investment engines such as pension funds and insurance institutions appear to wait out the initial waves of the Riyadh opening, risk-tolerant investors like mutual funds and ETF indices will have no hesitation leaping into the current. 

Making A Move

With the nascent opening of the market, there's ample opportunity to invest either now or to wait for the near future to see which parts of the Riyadh Exchange rise to the top.  Once Morgan Stanley Capital International includes the Riyadh Exchange in its international index, it'll be possible to invest in the totality of the Saudi economy, just as the Dreyfus Fund will allow investment in the riyal currency once it commits enough assets to join the big boys table.  Don't think that you need to invest in oil just to get a slice of the Exchange's profits: real estate outweighs petroleum by a slim margin in terms of market share, with banking close after.  What's more, the non-oil sectors have had the better performance in the past twelve months, with estimates of 5% growth during the last two quarters of 2015.  Since the market opens on Sunday, furthermore, traders can flex their investment muscles on the weekend while many of the world's largest markets have closed down.  Skeptics on international trade may do well to take a long hard look at a domestic portfolio in comparison to some of the world's other major markets: the MSCI US index has gained only 2.2% through the first six months of 2015, failing to beat out any of Europe, Japan, the UK, and emerging markets.

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