FTSE inclusion to boost Tadawul’s liquidity, investor base: report

The inclusion of the Saudi Stock Exchange (Tadawul) in FTSE Russell’s emerging markets (EM) index is “a watershed development” as foreign institutional investors will deepen market liquidity and aid price discovery, Al Rajhi Capital said in a report on Sunday.

“Further, it also paves the way for companies to raise equity capital more easily due to the broadening of investor base," the report added.

The Kingdom’s inclusion as a secondary emerging market (likely weight of 2.7 percent) is a significant development for Saudi capital markets, which could see inflows of $41 billion from foreign investors, according to Al Rajhi Capital’s calculations.

Saudi Arabia’s Tadawul All Share Index (TASI) rose 6.1 percent in March, registering its highest monthly gain in the past nine months. The rally was driven by confirmation of FTSE inclusion, and oil prices sustaining well above $60 per barrel.

Net buying by foreign institutions (both QFIs and SWAPs) also hit a new high last month, reaching SAR3.8 billion, bringing their year-to-date (YTD) net investment to SAR7.8 billion.

In comparison, net foreign investors buying was at SAR 0.5 billion in 2016, while 2017 witnessed net selling of SAR 0.37 billion.

“This clearly indicates heightened interest by foreign investors in the Kingdom. We expect this trend to sustain/harden going forward as global investors start aligning their portfolios relative to Saudi Arabia’s 2.7 percent weight in the FTSE EM index,” Al Rajhi Capital noted.

It added that Saudi Arabia’s inclusion in FTSE “materially increases the likelihood of its inclusion in the MSCI EM index,” a decision on which will be announced in June this year.

In March, FTSE said the Tadawul inclusion in its EM index would lead to nearly $5.5 billion passive inflows from foreign funds.

“However, we believe that active funds’ inflows will also gain momentum especially in the current backdrop of improving macro led by higher oil prices, and upsides from sustained reforms, Al Rajhi Capital said.

This is likely to lead to a higher TASI multiple compared to the past few years, when low oil prices weight on earnings of heavyweight sectors like banking, petrochemicals, and cement.