Saudi Arabia wins emerging status in quest for billions

By BLOOMBERG

DUBAI • Saudi Arabia won classification as an emerging market (EM) by a major index compiler for the first time, a key step toward the kingdom’s goal of attracting billions in additional stock investor inflows.

FTSE Russell said the Middle Eastern country will be included in its secondary EMs grouping effective March 2019, according to a statement on Wednesday. Saudi Arabia joins a category that already includes China, Russia and India.

The kingdom will have a 2.7% weighting in the compiler’s main EM stock benchmark, FTSE said. “Saudi Arabia is to be congratulated on the pace of the recent market reforms,” said Mark Makepeace, FTSE Russell’s CEO.

FTSE’s decision is one of two watershed index announcements the kingdom’s regulators — and the markets — are awaiting. MSCI Inc is expected to announce its decision in June.

The announcement will be welcomed by Saudi Crown Prince Mohammed Salman, who is in the US on a tour that includes stops in Washington and New York. He has been spearheading a plan aimed at transforming the nation’s economy, including turning its almost US$500 billion (RM1.94 trillion) stock market into a gateway for foreign investment.

Investors are also awaiting what could be the biggest initial public offering ever, that of stateowned Saudi Arabian Oil Co.

Some potential investors have stayed away from the Saudi stock market, reflecting disquiet at political upheaval that culminated late last year in the detention of dozens of princes and members of the business elite in what the crown prince said was a crackdown on corruption. Sentiment appears to be improving, according to senior Saudi officials.

Sarah Al-Suhaimi, the chairwoman of the Riyadh bourse, known as the Tadawul, said in an interview in New York before the announcement that conversations with investors have been positive, and that the FTSE inclusion could draw about US$3 billion of investments to the kingdom. She is “equally optimistic” regarding MSCI’s decision, Al-Suhaimi said.

Market Boost
Expectations that the biggest economy in the Middle East would earn the status upgrade have helped boost its main stock gauge in 2018. The Tadawul All Share Index has climbed 8.3% this year. It fell 0.7% yesterday as the positive decision was seen as priced in. An exchange-traded fund focused on Saudi stocks has advanced almost 9% in March.

The EMs designation by FTSE could prompt inflows of about US$5 billion from passive investors tracking the index, according to estimates by Mohamad Al-Hajj, an equities strategist at the research arm of EFG-Hermes Holding Sae. If MSCI follows suit in June, a further US$10 billion could pour into Saudi stocks.

There are some sceptics. A surge of inflows tied to inclusion in EM indexes will soon sputter out, Jason Tuvey at Capital Economics wrote in a note on Wednesday. Qatar and United Arab Emirates stocks soared in anticipation of EM index inclusion in 2014, then fell soon after, he wrote.

Still, with potential MSCI inclusion also lying ahead for Saudi Arabia, further upside for stocks is possible, said Muhammad Faisal Potrik, head of research at Riyad Capital in the Saudi capital. His year-end forecast for the Saudi benchmark equity gauge was already met this week, he said. “We would be closely tracking corporate earnings and signs justifying further price-to-earnings (PE) expansion, updating our views in due course, but would avoid jumping on the speculative bandwagon.”

What to Buy?
Foreign investors were net buyers of Saudi stocks every week this year, according to data provided by the stock exchange and compiled by Bloomberg. As of March 22, foreigners were net buyers of 6.2 billion riyals (RM6.58 billion).

Still, they represent less than 5% of total ownership of Saudi shares. And even before anticipated foreign inflows, stocks in Riyadh trade at more expensive valuations than their EMs peers: Their average estimated PE ratio was close to 14 times this week, compared to 12 times for members of the MSCI Emerging Markets Index.

Chemicals and steel manufacturer Saudi Basic Industries Corp and Al Rajhi Bank would be the companies likely to draw the strongest interest from investors abroad, according to EFG-Hermes’ Al-Hajj. See the table for the 10 stocks that he estimates will see the greatest inflows.