The Saudi Arabian stock market will join FTSE Russell’s emerging market index starting in March 2019; the move expected to attract investment to the kingdom worth billions of dollars.
Many equity funds around the world benchmark themselves against the index, and they will need to buy Saudi stocks when the change takes effect. With a capitalisation of about $500 billion Saudi Arabia is the Arab world’s largest equity market, according to a report by Gulf News.
Crown Prince Mohammad Bin Salman has made recent strides in launch reforms in the Kingdom in an effort to create jobs and diversify the economy away from oil, following low prices.
The kingdom will enter the index in several stages starting in March 2019 and ending in December 2019, to prevent Saudi Arabia’s from destabilising other markets as funds shift money to Riyadh, according to a statement by FTSE. The Kingdom is expected to have a weight of 2.7 per cent in the index, but with the Government’s intended five per cent public offer of state-owned Saudi Aramco, this could rise to as much as 4.6 per cent.
The lead up to entering the index has taken years of preparation as the Kingdom has had to address issues of corporate governance and easing the restriction on foreign ownership of stocks. Currently, foreign investors own less five per cent of Saudi Arabia’s market, although the expectation that this ratio will rise has lifted the stock index over nine per cent this year, with exchange data indicationg foreigners have already begun buying more stocks, purchasing a net $1.64 billion year-to-date.
FTSE’s decision will enable Saudi Arabia to attract around $5 billion on index-linked funds, according to EFG Hermes, and could see a total of $30 billion to $45 billion of inflows in the next two years if it reaches the foreign ownership levels of markets in the UAE, EFG Hermes added. Reaching the levels of Mexico and Russia would mean $90 billion of inflows.
“The decision to classify Saudi Arabia as Secondary Emerging market by FTSE is a watershed moment for the Kingdom. This is in line with the financial sector and capital markets development agenda of the Kingdom’s Vision 2030 programme and represents a major milestone and recognition of the numerous steps taken by CMA and Tadawul to facilitate QFI investments. As per FTSE, Saudi Arabia is projected to have an index weight of 2.7 per cent within the FTSE Emerging Index and 0.25 per cent of FTSE Global Equity Index Series. The decision will further improve liquidity, lower equity risk premium associated with the Saudi stock market, improve corporate governance and is an important step to further institutionalize the market. Year to date net foreign inflows (QFI & Swaps) totalled around SAR6.8 billion, from SAR 0.2billion 2017 YTD, and we expect significantly more inflows to come. Given that the inclusion is in tranches, we expect foreign investor flows to sustain for an extended period,” said Gaurav Shah, CEO of Al Rajhi Capital.
It is not clear, however, whether the market’s uptrend will continue in the coming months. The Saudi economy is still struggling with low oil prices, and at a valuation of over 16 times last year’s earnings, the market is not cheap compared to MSCI’s emerging market index at about 15.5 times.
The index has hit its target for 2018 and while a further rise was possible, it might need triggers such as improvement in the corporate earnings outlook, according to Saudi investment bank Riyad Captial.