Saudi Arabia’s largest natural resource is oil. Yet there is one deep, very different well that remains still untapped: direct foreign investment in the Tadawul, better known as the Saudi Stock Exchange.
With a market capitalisation of more than $560bn (£360bn) it is the final major capital market not yet open to direct foreign investment.
Yesterday, that changed.
Foreign investors with a five year track record and more than £5bn assets under management are now able to invest directly, subject to an overall 10 per cent limit of the Tadawul’s value.
Single stock ownership will be allowed up to five per cent of a listed company, with total foreign ownership capped at 20 per cent. On a case-by-case basis, investors will also be able to participate in initial public offerings.
For investors, there are no shortage of untapped opportunities.
Saudi Arabia is home to a string of world-class firms, including ten of the world’s thousand largest public companies – alongside two thirds of the top twenty listed corporates in the Middle East and North Africa. Largely out of reach, these majors have remained little known outside the kingdom.
SABIC, Saudi Arabia’s largest listed firm with sales of $50bn, is one of the world’s top-three chemical companies. With operations in more than forty countries, it is benefiting from rising global demand for its products.
Its lightweight materials can be seen in the instrument panel of the Land Rover Evoque, or the seat banks of Sao Paulo’s new monorail system. Both set new standards for energy efficiency.
SABIC is at the forefront of other innovations. It is pioneering a prototype of the world’s first thermoplastic composite wheel with a German automotive manufacturer. This could offer a lighter alternative to metal.
While synonymous with oil, the kingdom’s innovation is not limited to petrochemicals.
Maaden, one of youngest and fastest growing mining companies in the world, last year produced the first aluminium beverage can from Saudi rock.
With 300bn cans manufactured globally each year the growth potential is clear – specifically in emerging markets. Take India: its 1.2bn people consume just one can per capita, in contrast to the 310 consumed by America’s 320m citizens.
With vast indigenous deposits of bauxite and cheap energy plentiful, the key ingredients for producing aluminium, Saudi intends to become a global aluminium giant.
The Ras Al Khair complex in the Kingdom’s Eastern Province is a shining example. This $10.8bn joint venture between Maaden and US-based Alcoa, the world’s third largest producer of aluminium, is one of the few truly integrated facilities globally, controlling the full value chain from bauxite mine to rolling mill. This is unlocking non-oil opportunities.
Take the production of automotive sheets used in car assembly. Alcoa estimates that by 2025 every leading automaker will have an aluminium body programme in place to lower fuel consumption.
For car manufacturers, Saudi’s benefits are becoming clear. Jaguar Land Rover, part of Tata Group, is reportedly considering opening a manufacturing plant in the Kingdom. Not only is Saudi part of the Gulf Cooperation Council (GCC), which boasts one of the highest ratios of cars per household in the world, but it sits at the crossroads of international east-west trade routes.
The kingdom is investing in this geographical advantage.
Take the Tadawul-listed King Abdullah Economic City (KAEC), a special economic zone the size of Washington DC located 60 miles north of Jeddah. Situated on the Red Sea’s global trade artery between Asia and Europe, it offers a state-of-the-art megaport that can reduce east-west shipping transit time by five to seven days.
Ninety-three companies, including multinationals like Mars, Pfizer and Danone, intend to open operations in KAEC, many of them first-time investors in Saudi Arabia.
Saudi’s world-class companies, most created from scratch, demonstrate the Kingdom’s ability to build corporations for the future. These skills have already taken the kingdom beyond simply oil.
Look no further than the Tadawul’s 169 constituents. About one third are financial services, another third are materials and infrastructure-related and 25 per cent telecom and consumer companies.
With 70 per cent of Saudi’s 29m citizens under 30, Saudi has a young demographic profile. This is best reflected in information and communications (ICT) usage and readiness. According the World Economic Forum’s 2015 Network Readiness Index, it ranks sixth globally for mobile phone usage levels and eighth in terms of having a clear plan for using ICT to improve economic competitiveness.
Saudi offers investors a structural growth story propelled by a $130bn diversification plan focused on encouraging private sector growth, alongside a $140bn promise to invest in its transport sector over the next ten years.
Foreign investors are now able to deep drill for opportunities beyond oil in the Middle East’s biggest economy. It is a moment they have been eagerly awaiting.
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