No ‘heavy’ correction in Tadawul after MSCI inclusion: Jadwa

The Saudi stock market will not “succumb” to a heavy correction following the inclusion in MSCI Emerging Market index, as has been the case for regional indices in the past, Jadwa Investment said in a new report.

“Saudi Arabia’s upgrade is different than that of the others, with multiple FTSE EM and MSCI EM tranches occurring concurrently throughout 2019 and early 2020. Based on the experiences of other regional equity markets, investors entering the market prior and during inclusion into emerging market indices, are expected to drive TASI performance even higher,” it added.

The benchmark Tadawul All Share Index (TASI) has risen by around 15 percent since the beginning of 2019, and is currently trading close to four year highs.

Besides investor positioning prior to the first tranche of passive inflows in relation to the FTSE EM index inclusion, the brokerage firm said other supportive factors such as higher oil price and increased buying by qualified foreign investors (QFIs) was driving TASI in recent months.

During Q1 2019, oil prices rose back above $65 a barrel, while the largest ever fiscal budget was announced by the Saudi government in late 2018. Additionally, a pause in US interest rate hikes has helped bring about a rebound in equity flows to emerging markets in general.

Meanwhile, net purchases of SWAPs and buying by QFIs hit record levels, at SAR 12 billion at the end of Q1 2019, just over double the SWAP and QFI inflow seen in 2018 as a whole, the report said. 

The five-tranche inclusion of Tadawul in FTSE EM index, which began in March, will see the second inclusion taking place this month. The final inclusion is slated for March 2020. The MSCI inclusion will be in two tranches – first taking place in May followed by the next in August.

Saudi Arabia will be the largest Middle East market in the FTSE Emerging Index with an overall weighting of 2.7 percent, while in the MSCI Saudi Arabia Index will have a weighting of approximately 2.6 percent in the Emerging Markets Index, with 32 securities.

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