From IPO boom to standoff: Saudi Arabia’s capital markets ambitions meet a reluctant investor base

Saudi Arabia's IPO market has raised only $144 million through three listings so far this year, just 4% of the $3.53 billion raised in the comparable eight-month period of 2025, as valuation disputes, weak liquidity and geopolitical risk stall issuance. Only four of 17 companies listed on Tadawul since 2025 trade above their IPO price, while several planned offerings have been postponed or allowed to lapse. The CMA has proposed reforms that would impose underwriting commitments from the start of book-building and require forward-looking disclosures, aiming to improve pricing discipline and investor confidence, though this could further reduce near-term deal volume. Foreign-ownership liberalization could provide support, with Morgan Stanley estimating that eliminating the current 49% cap could draw about $7.4 billion into Saudi equities.

Analysis

The key transmission is not primary-fee revenue but a higher equity-risk premium for Saudi-listed small and mid-caps: impaired IPO aftermarket performance reduces the valuation support historically provided by scarce-float demand. A more disciplined issuance regime should ultimately reduce adverse selection, but the near-term effect is likely to be lower transaction volume and greater warehouse-risk scrutiny at domestic underwriters. This favors large, diversified global arrangers such as HSBC over Saudi capital-markets specialists whose revenue base is more directly tied to local ECM turnover.

The prospective domestic liquidity repatriation is a meaningful offset, but it is unlikely to solve price discovery by itself. Incremental local cash can support liquid large caps and government-linked issuers first, while unprofitable or aggressively valued growth issuers remain vulnerable to wider discounts; KSA ETF flows may therefore diverge sharply from the broader local IPO pipeline over the next 1-3 months. A removal or material relaxation of foreign ownership limits would be the cleaner rerating catalyst, because it expands investable float for global institutions rather than merely reallocating domestic liquidity.

Consensus may overstate the negative read-through for HSBC. A weak Saudi issuance calendar redirects regional advisory, block-trade, debt-financing and cross-border capital toward Turkey, India and Egypt, where execution volumes can be more durable; this is a mix shift rather than necessarily a lost-fee event. The bearish thesis is falsified if geopolitical volatility subsides, Saudi secondary-market liquidity improves, and a well-known issuer clears at a modest discount with sustained aftermarket demand—conditions that could reopen the window before the broader pipeline reaches formal approval.

For MS, the direct earnings sensitivity appears limited absent evidence of meaningful Saudi ECM league-table exposure. The more relevant signal is global: risk capital is becoming selective toward frontier and emerging-market issuance, which supports underwriting-fee dispersion in favor of banks with balance-sheet capacity and distribution, but raises tail risk around any firm commitments if market windows close abruptly.

Key Decisions for Investors

• Maintain or initiate a 3-6 month relative long HSBC / short KSA ETF position: HSBC has diversified exposure to alternative regional equity and financing activity, while KSA remains exposed to local liquidity, geopolitical beta and a delayed primary-market recovery. Target 8-12% relative return; exit if foreign-ownership reform is formally enacted with a clear implementation date or if KSA outperforms HSBC by 10% after a reopened IPO window.
• Do not underwrite a broad Saudi-equity rebound solely on expected domestic fund reallocation. Use any liquidity-driven KSA rally over the next 1-3 months to favor liquid large-cap exposure and avoid newly listed or prospective small-cap issuers until at least two offerings demonstrate positive 90-day aftermarket performance.
• Set an event-driven alert for a finalized foreign-ownership-cap increase. On confirmation, reassess a tactical long KSA ETF or selected high-foreign-demand Saudi large caps; the missing inputs are index free-float adjustments, implementation timing and which securities can absorb institutional positions without ownership headroom constraints.
• For financials exposure, prefer HSBC over MS on this theme over the next two quarters; do not make a standalone MS short because the Saudi ECM drag is unlikely to be material enough to overcome its broader U.S. capital-markets sensitivity.