Saudi equities remain attractive as FTSE, MSCI upgrades near: analysts

Saudi Arabia’s equities remain attractive, as benchmark Tadawul All Share Index (TASI) has gained just five percent since the announcement of the decision to upgrade Saudi to MSCI Emerging Market index, Al Rajhi said in a new report on Sunday.

In comparison, Tadawul peers had gained on average 50 percent post the inclusion announcements, it said, adding it implied a “measured reaction so far and a limited downside unlike that witnessed for other GCC markets post inclusion.”

The Saudi stock exchange will witness five tranches of FTSE inclusion during 2019 starting March and ending in December. The MSCI inclusion will be in two tranches – first taking place in May followed by the next in August.

Saudi Arabia is estimated to have an index weight of 0.31 percent in the FTSE Global Equity Index Series and 2.85 percent in the FTSE Emerging All Cap Index. MSCI will include Saudi Arabia in its EM index with a probable weight of 2.6 percent.

According to Al Rajhi, total inflow reached SAR 5.9 billion last year, but has already crossed SAR 7.1 billion in 2019 YTD.

“Both the inclusions (FTSE and MSCI) are in a phased manner and over a long period of time than just being included in a day that would have caused high volatility. This implies that we could see extended periods of stock market stability with limited downside,” it added.

Despite the market not being "cheap", PE multiples have increased only moderately post inclusion. However, demand (foreign inflow) is much more than supply (average daily trading volume) and is likely to drive up prices, the consultancy noted.

According to Al Rajhi, the Capital Markets Authority (CMA) working on F&O indicates a new set of investors that could increase inflows as cash trading market is smaller than futures trading.

"We continue to prefer Saudi stocks on higher visibility of earnings and index flows although Saudi equities look expensive on a relative basis to stocks on Dubai Financial Market," Faisal Hasan, chief business development officer and head of investment research, KAMCO, told Argaam.

"The outperformance by Dubai equities in February 2018 was solely due to the RE sector (+ nine percent month-on-month) which appeared' oversold' prior to the move up, and was driven higher on account of better than expected Q4 2018 results," he added.

According to Al Rajhi's report, Dubai saw $2.7 billion of inflows within a year before and a year after inclusion, resulting in total foreign ownership (in top 10 UAE stocks) rising from 4.7 percent to nine percent.

While the CMA and Tadawul estimate passive inflows of $5.4 billion on account of FTSE inclusion and $45 billion on MSCI inclusion, the Riyadh-based consultancy expects the same amount of flows into the market, given that the equity market size of Saudi is 7.5x times that of Dubai, at a minimum.

Write to Parag Deulgaonkar at parag.d@argaamplus.com