As Saudi Arabia's $500 billion-plus bourse prepares to open its doors to foreigners in June, outside investors appear ready to accept the political and financial risks as they finally get access to a market that rivals Brazil and Russia's.
Worth more than all other Gulf Arab markets combined, it is one of the last major global bourses to allow direct investment from foreigners and the opening is the most anticipated economic reform in the region of recent times.
The move is likely to start the process of incorporating Saudi Arabia into major equity indices by the likes of MSCI, and this could attract as much as $24 billion in foreign capital, according to one estimate.
Foreigners will still not have unfettered access and definitive rules have yet to be published. And yet the prospect of market opening has already helped the Saudi stock index to outperform its Gulf peers over the past 12 months.
Nevertheless, the index is down 2.7 per cent in the period as revenue from the Saudi oil industry, which accounts for more than 90 per cent of government income, has shriveled.
Saudi involvement in the conflict in neighboring Yemen has also heightened political risk. Yet even in combination with relatively high stock valuations, this seems to have done little to dispel investors' enthusiasm.
"Everyone wants to have a crack at Saudi Arabia," said Nick Smythie, chief investment strategist at Emerging Global Advisors. "It's the biggest market in the Middle East and a substantial country which offers exposure not just to energy but also to infrastructure, financials and other sectors."
While market capitalizations vary with stock prices and currency rates, the Saudi bourse is currently worth $528 billion compared with $600 billion for Brazil and $491 billion for Russia. It features the world's largest chemicals producer, Saudi Basic Industries Corp, and Saudi Telecom Co, the Gulf's biggest telecoms operator.
At the moment foreigners have access to the market only through swaps and exchange-traded funds, and the opening has been slower than many investors expected.
In August last year, the Capital Markets Authorities (CMA) published draft rules governing the opening of its bourse to so-called qualified foreign investors and started consultations.
These proposed foreign ownership be capped at 10 per cent of the market's total value and 20 per cent of any particular stock. A single foreign investor could own no more than 5 per cent of any listed company.
Final rules will be published on May 4 and the market will open by June 15, the CMA said.
"We have been excited about Saudi Arabia for 10 years so we are not holding our breath – they will move at their own speed and requirement," said Smythie.
Some investors had hoped the final rules could be published further ahead of May 12, when index provider MSCI announces semi-annual changes to its benchmarks and could start the process of including Saudi Arabia in its indexes that track stocks in emerging markets or frontier markets – a less developed and higher risk sub-set of emerging economies.
The process could take a minimum of two years, said Pavlo Taranenko, vice president and senior researcher at MSCI, adding that the company could make announcements at any time.
"We have to make sure that market is sufficiently acceptable in terms of a number of parameters and that our index is investable and replicable," said Taranenko.
MSCI launched a provisional Saudi index based on the draft rules. If this were used as the basis for incorporation into its emerging markets index, Saudi Arabia would have a 1.5-2 per cent weighting, meaning it would at least match Turkey's current weighting and be bigger than Poland and Chile's.
Weightings depend not only on overall market size, but also other factors including access for foreign investors. Brazil currently has a 7.7 per cent weighting and Russia 3.9 per cent.
With $1.7 trillion benchmarked against MSCI's emerging market index as of last June, the inclusion of any country in a leading index attracts large sums from investment funds.
HSBC estimates that Saudi joining the MSCI's or FTSE's emerging index at a weighting of almost 2 per cent could generate inflows of $4 billion from funds tracking such benchmarks.
If the country were to be classified as an emerging market in global benchmark indices, active and passive inflows could add up to as much as $24 billion, HSBC added in a recent note.
Flows are difficult to predict. Data for Qatar and the United Arab Emirates, both upgraded to emerging market status by MSCI in May 2014, show active fund flows built up about 6-9 month before their inclusion.
Amid the optimism, investors harbor some concerns about the Saudi bourse. "At the moment the operational efficiency of the exchange is not particularly good," said George Birch Reynardson of Somerset Capital Management, who has exposure to two Saudi companies. "If the new rules are too prohibitive, that could have some impact."
Saudi authorities require parties to use the same broker to buy and sell a stock and stipulate same-day settlement, making it difficult for those in different time zones.
Reynardson is also watching stock valuations closely. "They are a little bit demanding, especially on the consumer side, but there are some good opportunities as well, in the construction sector for example," he said.
But none of this seems to deter investors from a buying into an economy forecast by the IMF to grow 3 per cent in 2015.
"This year is not as clear cut as previous years due to lower oil prices," said Michael Daoud, head of Middle East equities at brokerage firm Auerbach Grayson. "But the market opening up to qualified foreign investors will provide a short term catalyst.”