Aramco's inclusion in indices to keep its valuation above $2 trillion

Saudi Aramco joined MSCI Emerging Markets Index on Wednesday which is expected to attract over $1 billion (nearly Dh3.67 billion) in capital flows and its inclusion in various indices will help it to sustain its valuation above $2 trillion, say analysts.

Vijay Valecha, chief investment officer at Century Financial, said Aramco's weightage will likely be in the range of 0.16 to 0.17 per cent.

"MSCI inclusion is expected to trigger capital inflow of $800 million while FTSE one could pull in $350 million in the near term. The inclusion of Aramco in various indices should help it sustain a valuation above $2 trillion. Recent Opec decision to reduce output by 500,000 barrels per day and Saudi Arabia voluntarily curtailing 400,000 barrels per day of output should support oil prices in the near-term. On account of its correlation to oil, Aramco shares are expected to sustain above current levels," Valecha said.

State-owned Aramco raised $25.6 billion in the largest initial public offering on record. The oil giant's shares on Wednesday were also included into the Tadawul index with Aramco's 12 per cent weight following Al Rajhi Bank, which had the largest weighting at almost 14 per cent.

Its shares fell for the second consecutive day on Wednesday, pushing its market value just below $2 trillion. Analysts attribute it to profit-taking after the MSCI inclusion.

Aashish Gidwani, investment analyst at Millennial Capital, said valuation of the world's most profitable company has been very impressive since its debut on Tadawul, making it the first company to be valued $2 trillion plus.

"With inclusion in MSCI, its valuation will further receive a boost.

The expected boost is about $1 billion in further investment coming from passive investors. Even there is more focus on passive investment; active investors would prefer to buy the stock as they would run against the benchmark if they avoid picking Aramco shares," Gidwani added.

Zachary Cefaratti, CEO of Dalma Capital, said Saudi Arabia's inclusion in the MSCI index put the Saudi stock market on the map for emerging market investors.

"We have seen many actively managed emerging markets investors underweighting or ignoring Saudi since the inclusion became effective, Saudi is now too large to ignore. It will be costly for emerging markets and global investors to continue to significantly underweight Saudi Arabia, particularly now that its MSCI constituency has increased and the IPO demonstrated the strength of the Saudi market," Cefaratti told Khaleej Times in an interview on Wednesday.

He said many emerging markets investors still don't understand the Saudi stock market as trading Saudi shares successfully requires specialised expertise and an understanding of the markets idiosyncrasies. "This can be evidenced by the significant outperformance generated by top-quartile funds versus the index, which demonstrates that the market remains inefficient and offers opportunities for adept traders to outperform," he added.

Some other prominent companies in MSCI Emerging Markets index from Saudi Arabia are Al Rajihi ( 0.35 per cent), Sabic ( 0.31 per cent) and National Commercial Bank ( 0.25 per cent).