Dubai: The Saudi equity market could be a strong candidate for an upgrade by the global indices provider like the MSCI or the S&P depending on its size and liquidity after it opens up for foreign investors, industry participants said on Sunday.

The Tadawul All Share Index has gained 14.8 per cent so far in the year, lagging behind the performance of its regional counterparts like Dubai, which has already been upgraded by the MSCI.

Foreign institutional investors are expected to begin direct trading of Saudi Arabian stocks before April next year, a news report said, quoting unnamed sources.

In August, the Capital Market Authority proposed rules for opening the market to direct investment sometime in the first half of 2015, including a 10 per cent cap on combined foreign ownership of the market’s value. At present, foreigners are limited to investing indirectly through swaps and exchange-traded funds.

Under the draft rules, foreign institutions would have to qualify for permission to invest. For example, they would usually need to have at least $5 billion (Dh18.4 billion) of assets under management, and investment experience of five years.

By this, foreign investors may get access to companies like Saudi Basic Industries Corp (SABIC), which is the world’s biggest petrochemicals company.

Elsewhere in the region, the UAE markets were upgraded to emerging markets by the MSCI and the S&P, a move that is expected to bring in multiple of billions of dollars into capital markets.

“The opening of Saudi market could as act as a first step in order to include the market in the MSCI or S&P index, but it can be done only in the medium term issues like settlement and corporate governance will be have to be cleared first,” Sebastien Henin, head of asset management at The National Investor told Gulf News.

Foreign investors

The upgrade for Saudi can happen in the next 18 months, an Emirates NBD Asset Management official said.

“Going forward, the focus will be on Saudi Arabia with the decision in principle to permit foreign investors. The initial upgrade of the UAE markets and Qatar has brought a lot more scrutiny in the region. I expect that to move to Saudi in the coming 12-18 months as investors try to get access to that market,” David Marshall, senior executive officer of Emirates NBD Asset Management company said.

“We remain structurally positive on Mena equities, favouring at the moment the UAE and Egypt — mostly due to cyclical reasons. We believe that both countries are in the middle of a cyclical upturn and the UAE has the additional benefit of having an economy that is less reliant on oil prices for company earnings growth,” said Marshall.

Crude oil, which has shed about 25 per cent since the start of the year, contributes to only 30 per cent of the UAE’s GDP.

“For Egypt, we expect increasing political stability to lead to greater foreign investment and share price appreciation from fairly depressed levels,” Marshall added.