Saudi Arabia’s Tadawul index surged 5.1% in its biggest rally in over five years, after reports that regulators may lift foreign ownership caps. Anita Gupta of Wealthbrix Capital Partners says the move could trigger billions in passive and active inflows, boosting Saudi’s weight in MSCI EM index.

Riyadh

Saudi Arabia's stock market saw a significant rally, adding approximately $124 billion in market value in a single session, after reports emerged that regulators may permit majority foreign ownership of listed companies. The Tadawul All Share Index rose by 5.1%, with bank stocks such as Al Rajhi Bank and Saudi National Bank posting record gains. 

Analysts from major financial institutions indicated that such a reform could lead to billions in foreign inflows, particularly if Saudi equities are reweighted in global emerging market indexes. While the move has not been officially confirmed by the Capital Market Authority, market participants responded positively to the potential for increased foreign participation. The Saudi market has lagged behind regional peers this year, but experts believe the proposed changes could help it catch up.

Saudi stocks soar on foreign ownership reform hopes

There's a big story in the regional markets today and all eyes are on Saudi Arabia. Saudi Arabia's stock market just staged its biggest rally in more than five years, adding roughly $124 billion in market value in a single session. The Tata Wall All Share Index jumping 5.1% after reports regulators may soon allow majority foreign ownership of listed companies. That is a potential game changer for global investors who have been capped at 49%. Now inside the index bank stocks led that charge soaring 9.2%. That was the biggest one day gain on record. Analysts at JP Morgan, EFG Omez and Franklin Templeton all now saying this move could trigger billions in inflows, especially if the MSCI and FTSE reweight Saudi equities in their emerging market indexes. El Raji Bank up almost 10%. The Saudi National Bank was the same. Alinma Bank up over 9% and Riyadh Bank up around 5% as well. Now this is a really significant turnaround for the Saudi equity market which has really been lagging regional peers this year. The Tata Wall still underwater for the year compared to the Dubai markets 30% gain. So let's unpack all of this with Anita Gupta. She's the CIO at Wealthbricks Capital Partners joining us live from Dubai. Anita, take us inside this Saudi surge. Certainly a long awaited move for global investors who have been watching the divergence between regional equities here, particularly this divergence between the UAE and Saudi Arabia. Do you think this gain on this report is justified? Good morning. Good morning, Dan. Absolutely. I think this gain is justified and this follows what happened in the UAE starting about 8 to 10 years ago when foreign ownership limits were starting being lifted for a great number of the UAE stocks. Today, the KSA has got about roughly 3.2% weight in the MSCI EM index. This could go up as liquidity improves. That's one of the criteria for inclusion in indices that would see passive inflows and of course active inflows too. The Tata Wall index has lagged the other markets globally as well as the UAE this year. And the Tata Wall market has got about 250 stocks in the index. So it's a very well diversified market with of course two heavyweights in it, Al Raji Bank and Aramco. Besides the fact that these two do determine the index movement to quite some extent, banks globally have rallied. So I see more upside for the Tata Wall index and I think the catch-up is going to continue. So the question is, if the catch-up is going to continue, how much more upside will there be? Because as you say, we're coming off a low base here. The Tata Wall really missing this year's EM rally because of significant concerns around the price of oil, of course macro growth headwinds as well. How much of foreign ownership story is actually going to offset some of those fundamental headwinds? So the Saudi economy does depend on oil to quite some extent in terms of revenue inflow for the government. This inflow that come to the government then flows down into the private sector and into the economy. Brent's been holding around $68. I think that's pretty positive for the Saudi economy. The breakeven price of oil production is really low for Saudi Aramco. So that's a positive. The Saudi government has been focused on investing more domestically, moving away from investing internationally this year. So I think all this is coming to fruition. We're going to see definitely a bump upwards in the index. We're going to see some fundamentals come into play in terms of stock selection. Valuations and dividend yield are important. In the GCC we've always seen that high dividend yielding stocks have performed better and those that pay steady dividends always do well. It's interesting because the reaction to this has also come thick and fast. We mentioned before how some of the global institutional capital flows may actually develop as a result of this significant announcement inside the kingdom, which I must add has not been confirmed by the CMA yet. But of course, stocks are moving on the report nevertheless. Franklin Templeton, for its part, saying a full removal of this 49% cap could potentially unleash something like $10 billion in passive inflows and nearly double Saudi's weight in the MSCI Emerging Markets Index. Now that would be really significant. Do you buy that $10 billion figure and how sticky are those flows likely to be given the fact that, remember, this is not confirmed yet? I think one constraint about investing in the Saudi market is the fact that you need to have an account to trade on the Tadawul Index. Now that does become a little cumbersome for some of the participants. So as far as institutional participation is concerned, you're going to see that continue from large asset managers. It's when it comes to global retail investors, you're not going to see that coming in. But we are seeing a big influx of ETFs even on the KSM market coming up. And those ETFs are going to see the passive investing. So the $10 billion does not seem to me a bit of a stretch. It seems to be very, very plausible. In terms of doubling in the index, I would say I wouldn't see that happening. I would see more an increase from, let's say, 3.2% to, let's say, 4%, 4.5% within the MSCI EM Index.

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