Saudi opens the door to major inflows to market
Dubai, July 26, 2014
Saudi Arabia’s decision to open up its stock market to foreign financial institutions (FIIs) in the first half of next year is a long-awaited step towards its inclusion in the MSCI emerging markets (EM) index, which could mean active net inflows of $13.3 billion to $26.6 billion, says a BofA Merrill Lynch Global Research report.
Coming just over a month after the UAE and Qatar’s upgrade to EM status, the latest decision could eventually lead to the Middle East and North Africa (Mena) region becoming as large as 5.2 per cent (with Saudi accounting for 4 per cent) of the benchmark compared with just 1.2 per cent at present. MSCI could start evaluating the current proposals in June 2015, conclude the process by June 2016 and implement EM inclusion by June 2017, the report says.
MSCI currently recognises Saudi via a domestic index with 45 constituents and $183 billion of free float market cap (43 stocks can currently be traded by foreign investors via swaps). With all but one stock having both a free float market cap above $1 billion and trading more than $1 million per day, there is ample scope for this index to qualify for EM status, it said.
“We estimate that depending on the number of stocks qualifying for EM inclusion, potential passive and active inflows could total anywhere between $13.3bn and $26.6bn. The MSCI Saudi index constituents currently trade $1 billion per day,” the report said.
“The opening of the Tadawul to foreign investors also confirms the authorities’ focus on economic diversification and steady economic reforms, particularly in the housing and labour markets, in our view," it added.
"Macroeconomic fundamentals remain robust. Consumer and business confidence could be boosted by positive perceptions of the market opening. Increased foreign institutional investment is likely to help improve corporate governance, widen the pool of available savings and boost Fx reserves accumulation. The economy has weathered reasonably well the impact of the labour market reforms and we see growth hovering around 4 per cent,” it said.
“We have maintained an Overweight stance in Saudi for many years and currently prefer this market to both the UAE and Qatar (where we are Neutral). Saudi’s market benefits from positive macro catalysts accelerating domestic oil production, improving Chinese activity data and slowing domestic inflation. Valuations are not looking stretched, trading at a consensus 2014 P/E of 14.6x with 14 per cent earnings growth, in-line with its long-run average premium to EM," the reports added. - TradeArabia News Service