SAUDI STOCKS SET FOR US$20 B INFLOWS
Kingdom hopes to become major destination for foreign capital
SAUDI Arabia’s inclusion in major emerging markets stock indices from today is likely to suck in around US$20 billion (RM81.8 billion) in passive inflows, but unease after Jamal Khashoggi’s murder and sluggish reforms could lead some active foreign investors to steer clear.
Saudi Arabia will be the biggest recent addition to the global indices, the largest of which is the MSCI Emerging Markets Index, which it joins from May. MSCI will give the kingdom a weight of 2.7 per cent, between Russia and Mexico.
The kingdom is hoping the inclusions, starting today when Saudi stocks join the FTSE Emerging All Cap Index, will kickstart its drive to become a major destination for foreign capital, after its global reputation was tainted by Khashoggi’s killing at the hands of Saudi agents in October.
The process should help bring in about US$20 billion of combined passive inflows during 2019, analysts estimate. That would push up foreign ownership from around two per cent, one of the lowest in the region, to around six per cent, according to Al Mal Capital.
“The 2.7 per cent pro-forma benchmark weight (within the MSCI index) is much more significant than prior index inclusions during the past decade,” said Alexander Redman from Credit Suisse.
“And given that the proportion of assets under management within emerging markets passive funds is much larger than during previous index inclusions, it means there will be a significant amount of net foreign buying of Saudi equities.”
Analysts say pre-positioning by investors has been slow ahead of the process, however. Arqaam Capital attributes that to concern about delays to mega-projects, the kingdom’s fiscal constraints, high valuations for Saudi-listed firms and concerns that government asset sales will oversupply the stock market.
“As has been seen with a lot of other markets undergoing emergence, the reform process is not always smooth,” said Edward Evans, emerging markets equity portfolio manager at Ashmore Group.