Saudi Arabia's upgrade to emerging market status by the global index compiler MSCI will boost investor sentiment and lead to a rally in large cap and mid-sized stocks in the medium term, analysts told Argaam.
The Saudi Stock Exchange (Tadawul) was approved for inclusion in the MSCI Emerging Market Index on Wednesday.
Tadawul will account for 2.6 percent weight of the Index and it may increase to 5 percent if state-run Saudi Aramco is listed on the market.
Saudi Arabia is the fourth Arab market to join MSCI Emerging Market Index after the UAE, Egypt, and Qatar.
Earlier this month, Riyad Capital said Tadawul All Share Index (TASI) could cross 9,500 points, on the back of a positive MSCI decision.
Here are the views from financial experts shared with Argaam.
1) Hettish Karmani, head of research, U-Capital
"As expected, the earlier upgrade by FTSE increased the probability of MSCI upgrade as methodology of both runs typically on similar lines. The upgrade was pretty much expected, evident from the recent foreign inflows worth billions in weeks prior to the upgrade. Overall, we believe Tadawul would witness additional flows of $40-50 billion, as the size of funds tracking MSCI is way more than those tracking FTSE."
2) Nishit Lakhotia, head of research, SICO Research
“MSCI decision to include Saudi in emerging market index is not surprising to us, given the rapid pace at which Saudi regulatory and market authorities have implemented reforms and opened up the market.
"Near-term profit booking, especially on some large caps that are near the 52-week-high can be expected, but in the medium term, we should expect market strength from flows (both active and passive) especially as both FTSE and MSCI inclusion will happen in phases in 2019. Accordingly, a market re-rating and also rally in some quality blue chip and mid-cap stocks is likely in near term.”
3) Faisal Hasan, head of investment research, Kamco Research
"Saudi Arabia’s inclusion into MSCI’s EM index will drive the Tadawul higher in our view, after being the clear outperformer in the GCC in 2018, with double digit gains YTD. The market should further rally until the index implementation, which is likely to happen 2019, in anticipation of passive flows.
"Following the inclusion, trading activity in the exchange and the contribution of foreign investors to overall trading activity should pick up. We also expect the total foreign ownership in the exchange’s stocks, which still lingers in single digits, to move higher as well."
4) Bassel Khatoun, managing director, Frontier and MENA, Franklin Templeton Emerging Markets Equity
“The decision to include Saudi Arabia in the MSCI EM Index is a welcome move and reflects the considerable effort the Kingdom has put into upgrading its market infrastructure, bringing it more in-line with international standards.
“Initially, Saudi Arabia will command 2.6 percent of the MSCI EM Index alone. However, with the upcoming Initial Public Offering (IPO) of Saudi Aramco, the most valuable company in the world, we might see Saudi’s weight in the index almost double to over 4 percent.
“The exact weighting will depend on Aramco’s final valuation and free-float. To date, the MENA region has accounted for approximately 1.6 percent of the MSCI EM Index, through the UAE, Qatar and Egypt. With Saudi Arabia’s inclusion, that share of the index will increase substantially, making the MENA region hard for international investors to bypass.”
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