Tadawul’s FTSE inclusion may attract inflows up to $5 bln: analysts

Index complier FTSE Russell is expected to announce this week its decision on Saudi Stock Exchange’s (Tadawul) possible inclusion as a Secondary Emerging market within FTSE Global Equity Index Series (GEIS). Analysts forecast that a positive update could lead to inflows of between $4 billion and $5 billion. The expectation is already beginning to reflect on Tadawul, with the benchmark index logging the highest year-to-date within GCC markets of 7.4 percent as of March 21.

Here are views from financial experts regarding the possible impact on Tadawul, following the FTSE decision:

1) Nishit Lakhotia, Head of Research at SICO

“Initially positive decision on inclusion will lead to speculative rally as active managers (both international and local) position around the review decision date betting on the outcome. In fact, a lot of recent strength in Saudi Arabia is flow driven with many betting on FTSE positive announcement for Saudi Arabia regarding emerging market inclusion.”

“Post-announcement the actual inclusion will likely happen after one year and that is when passive flows of $3 billion to $4 billion will come in.”

“(If FTSE inclusion is denied) all the recent speculative buying will likely be reversed and will likely see some short-term weakness. But we have MSCI review due early June, and again speculative positioning will likely drive the markets after some knee-jerk correction in April.”

2) Faisal Hasan, Head of Research at KAMCO Investment Co.

“The market is already pricing in Tadawul’s inclusion by FTSE Russell in our view. We believe the index inclusion will drive foreign participation further and make a better case for higher allocation towards Saudi Arabia from regional and emerging market mandates. Moreover, we expect the FTSE inclusion to keep the market upbeat for the upcoming MSCI review to emerging market status.”  

“If the FTSE inclusion were to be deferred, it would definitely surprise market participants at this point, in our view.”

3) Hettish Karmani, Head of Research at U-Capital

“If FTSE decides to label Saudi Arabia as an emerging market, the market will witness a run-up until its actual inclusion (mostly in 2019). Assuming it represents 2.5 percent of the secondary emerging market, we will see inflows between $4 billion and $5 billion.”

“(If inclusion denied) we might witness some correction as the index has rallied already on the assumption of inclusion, but the correction will end soon.”

4) Akber Naqvi, Managing Director at Al Masah Capital Ltd

“The inclusion of Saudi Arabia into FTSE Emerging Markets Index will spur a surge in inflows of approximately $4.4 billion and could constitute about 2.5 percent of the index. With the listing of Saudi Aramco, the country’s weight in the index may increase to 5 percent.”

“Saudi Arabia’s FTSE inclusion will place the UAE second as its weight in the FTSE GCC Index will go down from 52 percent to 21 percent after Saudi Arabia, which would account for 60 percent of the index.”

“A delay in Tadawul’s inclusion could cause the Saudi index to fall. Last September, a day prior to FTSE’s decision, the Saudi Index had fallen 0.6 percent amid rumors that they would fail to be admitted. Subsequently, the market saw a further drop by 0.8% as Saudi was left out of FTSE Emerging Markets index. These numbers are not drastic… and the country would easily recover given plans to potentially list 5 percent of Saudi Aramco.”

5) Aditya Pugalia, Director of Financial Markets Research at Emirates NBD

“Should FTSE decide to include Tadawul in the EM index, it is likely to have a weightage of anywhere between 2.3 percent and 2.6 percent. This would translate into fund flows of about $4 billion.”

“(Meanwhile) the market is already partly pricing in a positive decision and hence any delay would be taken as negative and could lead to some paring of positions. A negative signal by FTSE would also cast doubt on the MSCI decision, even though both are unrelated.”

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com