But there are limitations to consider. The country's Capital Markets Authority has specified that qualified foreign investors must have assets under management of at least 18.75 billion Saudi Arabian riyal ($5 billion), although some might qualify with at least 11.75 billion riyal. All potential qualified investors must have a five-year investment track record.
There are also strict caps. The Capital Markets Authority said a single QFI is limited to owning 5% of a single stock. There is a 20% limit on a single stock across all QFIs, and a 10% total market cap across all QFIs investing in the stock market as a whole.
“June 15 is a significant day, but these restrictions and peculiarities of the market mean overall inflows will happen over time — it will not happen on day one,” Mr. Mlouka said.
Another issue that international investors might find hard to deal with is the country's trade settlement cycle. The period between trade and settlement in Saudi Arabia is T+0. International investors would be more used to T+1 or T+2, sources said.
“Some foreign institutional investors may not be comfortable with the concept of pre-funding, which T+0 effectively requires,” said Mr. Hasham.
However, Mr. Hasham said that is alleviated somewhat by the currency's peg to the dollar, meaning investors are “not exposed to currency risk on pre-funding as they would be in the case of a floating currency. The currency is also fully convertible and there are no restrictions on repatriation, which gives additional comfort.” A spokesman for HSBC said the firm is reviewing options regarding a QFI application, and will make a decision in due course.
What will really propel investment will be the country's inclusion in one of the index providers' emerging markets indexes, Duet's Mr. Mlouka said.
“We believe the Saudi Arabia market would likely have a weight of around 1.6% in (the MSCI Emerging Markets index) and potentially be the 12th largest country in terms of weighting,” Mr. Hasham said.
Were Saudi Arabia to be included in one of the index providers' emerging markets indexes, it could attract aggregate passive inflows of $4.1 billion.
“If Saudi were to be included in global benchmark indices as an emerging market, we estimate this could result in up to $24 billion of passive and active inflows.” Mr. Hasham said. However, he stressed inclusion in the MSCI Emerging Markets index is not expected before 2017.
Saudi Arabia will have to prove it can function as an emerging market before the market is granted entry into that club.“The biggest concern is how the QFI regulation will transition from a regulation to implementation,” MSCI's Mr. Lieblich said. “Will it be smooth? Will there be hiccups? It is all good having regulation that, theoretically speaking, addresses all the points, but we have seen other countries that have very good and sophisticated regulation, but at implementation it sometimes breaks. That is why we never make decisions based on theory. We are giving market participants time to test the waters and to give us some feedback on the accessibility to the market.”