▶ MSCI in­dex in­clu­sion ex­pected to be big­ger fac­tor than lower oil prices

The National - News - - BUSINESS - SARAH TOWNSEND

Oil dip­ping be­low $50 per bar­rel is un­likely to mute the cap­i­tal in­flows ex­pected from Saudi Ara­bia’s in­clu­sion in the MSCI Emerg­ing Mar­kets In­dex, be­cause the king­dom has suf­fi­cient buf­fers to sup­port the mar­ket, ac­cord­ing to a di­rec­tor from Franklin Tem­ple­ton In­vest­ments.

“The short-term cor­re­la­tion be­tween oil prices and mar­ket per­for­mance is that flows rise con­sid­er­ably with higher oil prices be­cause mar­kets are driven by in­vestor sen­ti­ment and tend to re­act neg­a­tively to prices drop­ping,” said Salah Shamma, head of Mena In­vest­ment at Franklin Tem­ple­ton Emerg­ing Mar­kets Eq­uity, dur­ing an event on Thurs­day.

“How­ever, the long-term cor­re­la­tions, based on the fun­da­men­tals of the mar­ket, are op­er­at­ing on a dif­fer­ent scale and are not so ev­i­dent, due to govern­ment buf­fers,” he told the Wealth Ara­bia Sum­mit in Dubai.

The Saudi govern­ment presents a buf­fer be­tween oil prices and the mar­ket. “Even if oil prices drop, the govern­ment can con­tinue to sup­port the mar­ket and can con­tinue to re­alise higher cor­po­rate earn­ings which ex­plains the lower cor­re­la­tion,” he said.

Global oil prices have plum­meted 20 per cent in the past three months to be­low $50 per bar­rel on Thurs­day from $80, fol­low­ing pro­duc­tion amend­ments in­sti­gated by Opec. It comes af­ter prices rose sub­stan­tially from March fol­low­ing a three-year oil price slump, help­ing to boost global eco­nomic growth and buoy in­vestor sen­ti­ment.

The re­cent drop is “one of the key con­cerns in­vestors may have right now”, given that it comes so soon af­ter in­dex provider MSCI awarded the world’s big­gest oil ex­porter emerg­ing mar­ket sta­tus on June 21, ac­cord­ing to Mr Shamma.

The land­mark in­clu­sion paves the way for an es­ti­mated $40 bil­lion of ad­di­tional flows to the king­dom’s $500bn-plus stock mar­ket – a five-fold in­crease from the cur­rent $8bn, an­a­lysts in­clud­ing Franklin Tem­ple­ton said at the time. It gives the king­dom’s stocks a rep­re­sen­ta­tive weight­ing of about 2.6 per cent of the in­dex, with 32 se­cu­ri­ties, ac­cord­ing to MSCI.

The de­ci­sion fol­lowed a sim­i­lar move by FTSE Rus­sell in March and was a sec­ond achieve­ment for Saudi Ara­bia, which has in­tro­duced a se­ries of re­forms to de­velop cap­i­tal mar­kets in line with its Vi­sion 2030 eco­nomic di­ver­si­fi­ca­tion strat­egy.

The de­ci­sion will “ul­ti­mately help trans­form the king­dom into one of the largest and most at­trac­tive emerg­ing mar­kets in the world,” Mr Shamma told

The Na­tional shortly be­fore MSCI’s an­nounce­ment.

He told sum­mit del­e­gates that the in­clu­sion re­mains sig­nif­i­cant, as it puts the GCC on the map for for­eign in­vestors and may en­cour­age them to in­vest some of their al­lo­ca­tions across the whole re­gion, not just Saudi Ara­bia.

He also said a con­tin­ued rise in govern­ment ex­pen­di­ture will lift cor­po­rate earn­ings next year, fur­ther ben­e­fit­ing cap­i­tal mar­kets. Saudi pub­licly traded com­pa­nies are pro­jected to ex­pe­ri­ence 11.6 per cent an­nual growth in earn­ings over the pe­riod 2017 to 2019, com­pared to mi­nus 3 per cent an­nu­ally be­tween 2014 and 2017, ac­cord­ing to Franklin Tem­ple­ton’s lat­est es­ti­mates.

“Cor­po­rate earn­ings have bot­tomed out and we think this re­cov­ery will con­tinue,” Mr Shamma said. The re­cov­ery has been more vis­i­ble in some sec­tors, in­clud­ing health care, re­tail and fi­nan­cial ser­vices, than oth­ers, such as ma­te­ri­als com­modi­ties and tele­coms.

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