Saudi Arabia’s stock exchange, which has gained nearly 25 percent so far this year, is likely to rise further in 2014, benefiting from the upcoming budget expectations in addition to annual dividend announcements, say economic experts.

“The challenge ahead for the Capital Market Authority (CMA) will be to swiftly mold and adapt to a changing investor base seeking harmonized environment with other emerging markets,” said Asim Bukhtiar, vice president/head of research at Riyad Capital.

He was commenting on Tuesday’s media reports that overseas investors in the Saudi stock market will face restrictions, including a 20 percent ceiling on combined foreign ownership of any listed stock.

But a Jeddah-based economist indicated that the news about ceilings on ownership would not derail the market’s positive outlook.

Asharq Al-Awsat added that foreign funds investing in Saudi Arabia would need to have minimum assets of $1 billion, and individual or retail investors would not be allowed to own shares in Saudi companies except through these funds.

“The practical implications of such caps are probably fairly limited,” commented Jarmo T. Kotilaine, a regional analyst.

“I think this restriction should be seen as part of the gradual process of opening up the market,” he told Arab News.

Asharq Al-Awsat also reported that foreign funds will not be permitted to hold more than 10 percent of the market value of Saudi stocks.

“Similar caps are not rare around the world and, indeed, exist in other GCC countries as well. In general, the level of foreign ownership in Saudi companies is low and the practical implications of such caps are probably fairly limited,” added Kotilaine.

John Sfakianakis, a Riyadh-based investment strategist, said: “If foreigners are limited to owning only 10 percent of the overall Saudi market, which has a capitalization of about $580 billion, that might not necessarily disappoint foreign investors.”

Sfakianakis added: “Taking into account that around $50 billion could be anticipated to be invested by foreigners in the market, in today’s market terms and a 10 percent cap puts the upper limit to $58 billion. At present, less than 2 percent is owned by foreigners via swaps and an 8 percent increase is a fourfold increase that is not at all negligible.”

He said the Saudi stock exchange has more upside given the amount of liquidity that is entering the market, and the expectation is that it will cross the 11,000-mark later this year, barring any major regional geopolitical event or major global downside pressure.

The Tadawul All-Share Index (TASI) has rallied since authorities announced plans to allow direct foreign ownership of shares early next year.

The index closed on Tuesday at 10,659.56 points compared to 8,535.60 points on Dec. 31, 2013. It gained 24.88 percent so far this year.

Commenting further on market gains, Kotilaine added: “While the performance of TASI reflects the favorable fundamentals in the Kingdom, it also mirrors the strong dynamics of stock markets around the world in an environment where monetary policy remains very loose. This has implications for market behavior that are not properly understood given the uniqueness of the current environment.”

He added: “Even though we are unlikely to see any significant near-term change in the situation, there is some concern about the sustainability of the current high valuations in an environment that has for some time been characterized by low volatility.”

Reuters reported that foreign ownership of some other major emerging markets around the world is considerably higher.

Reuters suggested that if foreigners are limited to owning only 10 percent of the overall Saudi market, which has a capitalization of about $580 billion, that could disappoint investors.

But Sfakianakis said: “Any news related to the opening of the market is great news given it’s potential and for foreigners that is far better than simply using swaps and ETFs to access the market.”

He said:”As the market opens and foreigners become more involved in the market, the comfort level between locals and foreigners will increase. This level of comfort has increased over time in other emerging markets that have adopted a gradualist approach to foreign direct investment in the stock market.”

Asharq Al-Awsat also reported that foreign funds would not be allowed to own shares in certain real estate developers with operations in the holy cities of Makkah and Madinah, to ensure that non-Muslim investors did not own assets there.

Such companies include Makkah Construction and Development Co, Taiba Holding and Jabal Omar Development Co, the newspaper said.

According to Reuters, the foreign ownership limits could reduce Saudi Arabia’s weighting in major international equity indexes compiled by companies such as MSCI, if the index compilers choose to include the country after foreign investors are allowed in.

The CMA has said earlier that it would publish draft regulations for the reform in August, before a 90-day public consultation period.

On Tuesday, a CMA spokesman told Reuters that the rules were still in the final consultation stage in the CMA’s legal department, and would be published in a few days for public consultation.

According to Reuters, he said he could not comment on the accuracy or otherwise of the Asharq Al-Awsat story.

Commenting on the media reports, Basil Al-Ghalayini, CEO of BMG Financial Group, told Arab News: “We still do not know the accuracy of this piece of news as the rules regulating this type of investment have not been published yet. Having said that, we anticipate the opening of the market to be gradual with certain restrictions or limits as a teething process. This is prudent to prevent volatility by short term major speculators.”

In his comments to Arab News, Asim Bukhtiar, vice president /head of Research at Riyad Capital, added: “Initially all stakeholders, including the regulator and foreign investors, will gauge interest and appetite for investing in the Saudi market. If the restrictions are too onerous, the excitement may dissipate quickly. Large institutional investors may stay away from Saudi equities due to insufficient float.”

He added: “If the goal is to protect local retail investors, then the quality of company disclosures should be improved. Management discussion in financial statements should include greater commentary on the company’s operating environment and the outlook for upcoming quarters.”

Ultimately, he said, investing and trading should be a “science” more than an “art”.

He said: “The challenge ahead for the CMA will be to swiftly mold and adapt to a changing investor base seeking harmonized environment with other emerging markets.”

Tamer El Zayat, a senior economist at the National Commercial Bank, Jeddah, said: “Well, I do not believe that the news about ceilings on ownership will derail the positive outlook that have been witnessed of late. It was expected all along since the announcement took the market participants by surprise that regulations will entail limitations on ownership and in my opinion the CMA is justified in treading carefully with the initial stages of opening up.”

He said: Opening up is a gradual process and not a shock therapy. It must be noted that the entrance of foreign expertise and know how into a market dominated by intra-day traders will add the depth needed to ensure stability.”

El Zayat added: “Ostensibly, an influx of capital is favorable anyway because It will increase liquidity and support prices, by investors that are medium to long-term in nature and that are looking to diversify geographically. Reading too much into any proposed ceilings will undermine this optimism that is based on a new dawn post prohibition.”

However, he said: “I believe that TASI is bound to cross the near term resistance of 11,000 since local investors will maintain their holdings, they have already bucked the summer trend that usually witness withdrawals and lower trading volumes.”