A postponed initial public offering in Saudi Arabia is the latest setback for a stock market that’s trailing global peers for the fourth year in a row.
Mutlaq Al-Ghowairi Contracting Co’s decision to delay its share sale due to the war in Iran derailed what would have been the Gulf region’s biggest listing this year. It’s adding to the woes of the kingdom’s Tadawul All-Share Index, which has gained about 5% this year — just behind MSCI’s global benchmark — despite a windfall from higher oil prices.
While the government has been pushing for years to get more investment into the $2.6tn market, foreigners have stayed away from Saudi equities, which, according to a Bank of America Corp report, continue being one of the largest underweight positions among emerging-market funds.
The Iran war would have added to their caution, given Tehran’s threats to target Gulf nations that host US military bases.
But there’s a slew of other factors too, above all, the composition of the market which is dominated by energy, petrochemicals and financial stocks. While surging oil prices have lifted the Saudi Aramco energy conglomerate and a handful of other names, emerging-market investors have largely bypassed companies that are not geared to technology and artificial intelligence.
The Riyadh index is hampered “by the relative lack of exposure to the broader AI theme which has gripped markets globally,” said Fraser Harle, investment manager at Aberdeen Group Plc.
“The market remains unfamiliar territory for many global EM allocators, whose exposure has historically been concentrated in a handful of the larger, more liquid names,” he added.
Still, the Saudi benchmark is faring better than Middle East peers. Its gains this year reverse some of the 2025 underperformance versus the MSCI GCC Countries Index, which was the biggest on record in data going back to 2006.
Indeed, the market was struggling even before the conflict. Saudi Arabia has run persistent fiscal deficits since 2022, and the war has exacerbated those strains. The deficit more than doubled from year-ago levels in the first quarter of 2026, while the economy grew at the slowest pace since mid-2024. To mend that gap, authorities are said to be revisiting plans for major projects tied to the kingdom’s Vision 2030 investment program.
To revive inflows, Saudi authorities said earlier this year non-residents would be allowed to invest directly in local equities, a key step in widening access to the market. However, they are yet to review rules limiting foreign ownership in local stocks. Scrapping the current 49% cap could unlock $10bn in fresh investment, according to forecasts from Wall Street banks.
“Investors who were pricing in a linear acceleration of reform momentum have had to recalibrate, and the honest reading is that some of the diversification targets have been pushed out even as the structural story continues to evolve,” Aberdeen’s Harle said.
As a result, the Tadawul’s valuation premium over other emerging markets has narrowed to about 20%, from an average of 32% over the past decade, a change that appears justified, given earnings-growth forecasts. Analysts have upped their profit estimates for Saudi stocks by 7% since the start of the year, but that’s far below the 39% increase for MSCI’s emerging equity index, with the latter again driven by Asia’s tech-heavy markets.
A sustained oil windfall could offset some of those concerns. Morgan Stanley remains bullish on Saudi equities, arguing the kingdom is in a better position than most Gulf neighbors to benefit from high oil prices, because it can export via the Red Sea rather than the blockaded Hormuz Strait. The bank also sees crude prices holding above $90 a barrel this year, the level at which the Saudi budget balances.
Still, the oil tailwinds may not be distributed evenly across the market, the Morgan Stanley team led by Yomna Moheieldin told clients in a note. They expect energy, industrial and financial stocks to outperform domestically-oriented sectors.
“The current environment is creating selective rather than broad-based opportunities across the market,” they added.
