EFG Hermes upgrades Saudi Arabia ahead of MSCI, FTSE inclusion

EFG Hermes has revised up its outlook for Saudi Arabia to overweight from neutral, ahead of the Kingdom's proposed inclusion in the MSCI and FTSE emerging market indexes, the Egyptian investment bank said in a note.

The inclusion in the two indexes will drive the total expected return from Saudi stocks by around 30 percent by mid-2019, supported by foreign inflows, attractive yields, and regulatory-driven consolidation.

“We expect the [emerging market] EM upgrades to drive [estimated] $30 to 45 billion total foreign inflows (of which $14 billion would be passive) into Saudi Arabia,” the bank said.

“Our market call is supported by an expansionary budget in 2018, which our economics team expects will lead to a gradual pick-up in economic growth from Q2 2018,” it noted.

Saudi Arabia unveiled a SAR 978 billion annual budget for 2018 in December last year, and expects its economy to grow by 2.7 percent this year versus a contraction of 0.5 percent in 2017.

Banks, insurance companies, FMCG firms and healthcare providers will gain from the anticipated upgrade, the note said, recommending Al Rajhi Bank, Tawuniya, Abdullah Al Othaim Markets and Mouwasat as favourites.

However, sharp correction in oil prices and renewed geopolitical concerns could have larger downwards risks for MENA equities.

Foreign ownership in Saudi Arabia is low, limiting the scope of foreign selling around negative developments, the report said, adding that local institutions supported by government-related enterprises (GREs) have played a stabilising role in the Saudi market at key inflection points.

Meanwhile, the bank said Aramco’s initial public offering (IPO) could impact valuations in the short-term, as local investors could sell down other stocks to fund their participation in the IPO.