Saudi Arabia is set to make one of the most dramatic moves yet in its push to revive its underperforming equity market: allowing foreigners to own a majority stake in local companies.
The Capital Market Authority is close to easing rules that cap foreign ownership of listed companies at 49%, said Abdulaziz Abdulmohsen Bin Hassan, a member of the five-person board that governs the regulator.
“I think we’re almost there,” he said in an interview this month. “It could come into effect before the end of the year.”
Any shift above 50% would do away with years of precedent and put Saudi equities in a position to claim a bigger weighting in MSCI Inc.’s benchmark indexes. That in turn would attract additional investment to the market from passive and active fund managers. In calculating its indexes, MSCI reduces the weighting of companies that are subject to foreign ownership limits.
Approval is still needed from other stakeholders in the government but the regulator is ready to push ahead, he said. Bin Hassan didn’t specify how big a stake foreigners may eventually be able to own in Saudi companies.
Companies on Saudi Arabia’s $2.3 trillion main exchange make up about 3.3% of the MSCI Emerging Markets Index.
“A decision to relax means the weight in MSCI will all of a sudden go up and more capital will flock to the market,” said Fadi Arbid, founding partner and chief investment officer at Amwal Capital Partners.
Saudi Arabia is looking to reinvigorate its stock market after months of underperformance sparked by geopolitical strife, stagnant oil prices and revisions to public works projects and spending. The main Saudi index has fallen 9.6% this year, the worst performance in the region. The MSCI emerging-markets benchmark, in contrast has gained 25% in dollars.
Still, foreign investors increasingly are allocating money to Saudi equities, drawn in by market reforms and its cheap valuation.
The Gulf nation’s need for investment from abroad is becoming increasingly pronounced as Saudi Arabia pursues its Vision 2030 economic transformation plan at a time when high spending and low oil revenue are driving budget deficits.
Adjusting foreign ownership limits may help to immediately boost passive investment, while encouraging active investors to consider whether they should increase exposure to Saudi companies, Arbid said.
Saudi firms with the largest percentage of shares owned by investors abroad include insurance provider Tawuniya, tech firm Rasan and telecom operator Etihad Etisalat. All stand above 20% but below 25%.
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