Foreign investors spend $941 million on Saudi proxy shares in hopes of ownership

Published August 5th, 2014 - 03:55 GMT

Foreign investors spend a total of $941 million on Saudi proxy shares last month, more than double the amount in June after an announcement promised full ownership rights early next year.

At the moment foreigners cannot directly own Saudi Arabian stocks. But they can enter into a complex proxy arrangement whereby a Saudi national owns the shares but they benefit from the share price movements and dividends.

New deal?

This has not been very attractive to investors in the past. But that has changed with the announcement that foreign ownership will be allowed next year. The Tadawul index is up 5.7 per cent since this news last month, despite a fall in the volume of trading by 32 per cent.

In theory this looks like a fine opportunity. The Tadawul is undervalued because it excludes foreign investors. When that changes so should prices.

However, in practice investors should recall such vague promises in the past and wonder if this will actually happen, or whether some addition to the current proxy arrangement will be offered instead.

Year-to-date the Tadawul is up 24 per cent, a huge rise that might also give new investors cause to pause for thought. Still it’s less than half its peak valuation before the global financial crash.

Geopolitical risk

You would also have to weigh the geopolitical risk with the Islamic State in Iraq close by and Syria in a state of civil war. The Saudi border was recently reinforced with 30,000 troops.

That said the guarding of the world’s greatest oil reserves is a key Western strategic priority and the US is a long-time ally of Saudi Arabia. Securing foreign investors for the Tadawul is another way join the international community and give the US even more reason to maintain Saudi Arabian security.

Emerging market investors generally diversify their risk across many markets and Saudi Arabia could become a high flier if its bourse opens up fully, then again we will believe this only when we see it.

Copyright 2021 Peter John Cooper All rights reserved

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