The IPO pipeline for 2015 is likely to be attractive in Saudi Arabia, including a mix of companies from sectors such as transport, manufacturing, health care and retail.

Jadwa Investment has made this observation in its update on “Opening the stock market to foreign Investors.”

The report came in the wake of the Capital Markets Authority’s (CMA) recent confirmation that the region’s largest, diverse and most mature capital market — the Tadawul — will be open to qualified foreign institutional investors (QFIs).

Saudi Arabia’s economic diversification strategy is driving private sector activity, which will support the performance of listed companies, according Jadwa economists.

“We see this diversification strategy not only driving private sector activity, which will support the performance of listed companies, but also support strong IPO activity as the private sector is handed a larger role in being the main driver of growth going forward,” they said.

The Jadwa report added: “Looking ahead, despite the lower priced oil market (we see full year Brent averaging $61 per barrel for 2015), Saudi Arabia’s huge foreign reserve ($710 billion at the end of February 2015), and low debt-to-GDP levels (1.6 percent of GDP-allowing ample room to issue sovereign debt), all means that the government can remain committed to key large-scale industrial projects and an economic diversification strategy.”

The report added:` “We see this diversification strategy not only driving private sector activity, which will support the performance of listed companies, but also support strong IPO activity as the private sector is handed a larger role in being the main driver of growth going forward. In 2014, we saw the $6 billion IPO of the NCB, and the IPO pipeline for 2015 is likely to be just as attractive.”

The researchers commented: “If you consider that some sectors benefit from subsidies, through capped energy prices or low-priced feedstock, and foreigner’s investing in the Saudi stock market reap the benefits of a zero tax liability on capital gains, plus the withholding tax rate of 5 percent on dividend payments is amongst the lowest globally, it becomes apparent that the Saudi stock market is very attractive for QFIs.”

In April 2015, the report pointed out the the Saudi stock market’s capitalization stood at $528 billion, equivalent to two thirds of Saudi GDP, making it larger than the Mexican stock market.

When compared regionally it is almost the same size as all the other equity markets in the Gulf combined. Opening up the market is likely to lead to inclusion into the MSCI emerging market index by mid-2017, with as much as $40-50 billion of total foreign inflows.

According to Jadwa Investment, the CMA has confirmed that the opening of the stock market is to support institutional investors and reduce the role of retail investors. The draft proposals have obviously been carefully considered to reflect this goal.

After consultation with various relevant parties, the full rules for participation will be published on May 4.

“We believe that one of the results of the consultation will mean that definition of QFIs and QFI Clients will include Sovereign Funds, Public and Private Pension Funds or Endowments, Foundations and sophisticated family offices. We view the inclusion of such entities as an overall positive, since they are major investors in the global marketplace and stable in the nature of their investment patterns,” said the report.

It said that the Saudi stock exchange’s trading activity is dominated by local retail investors.

According to the CMA, at the end of 2014 around 2.4 million retail investors had invested in listed companies, holding just over a third of total listed Tadawul shares by value.

Currently, the report said that retail investors in Saudi Arabia account for a higher proportion of traded volumes, at 90 percent, when compared to other large market indices. In India, retail trade volumes account for around 34 percent, with retail investor volumes much smaller in the US, where they account for less than 2 percent.

The report said: “Looking ahead into 2015, although we see the TASI improving, the increase in prices and values of stocks will not necessarily reflect the Kingdom’s strong macro fundamentals, but perhaps will be reflective of short sharp movements dictated by oil prices, regional geopolitical developments and international economic performance. In the long-haul we expect to see more of a connect between the Saudi stock market and the domestic economy.”