Here’s what analysts are saying about Tadawul’s MSCI inclusion

The inclusion of Saudi Stock Exchange (Tadawul), the Middle East's largest exchange, in MSCI Emerging Markets (EM) index this month will have a positive impact for regional markets, analysts told Argaam.

Many experts also ruled out a major correction post-inclusion.

Global index provider, MSCI Inc. on Monday said it will add 30 Saudi Arabian securities, representing an aggregate weight of 1.42 percent, in the MSCI EM index as of the close on May 28. The second tranche inclusion is expected in August.

Read: MSCI announces inclusion of Saudi Arabia in Emerging Market index

 “Although some market softness is expected post first inclusion, the fact that more MSCI and FTSE inclusions are scheduled over the next few months, a major correction is unlikely, said Nishit Lakhotia, head of research, SICO Bank.

Most markets that rallied before receiving emerging market status over the past have faced a steep fall following inclusion as investors tend to overbuy into the inclusion news.

Issam Kassabieh, a senior financial analyst at Menacorp, however, said multiple factors need to be considered in the case of Tadawul.

“Oil price levels at the time of inclusion and just right after need to be considered as Vision 2030 and the government budget is largely based on oil prices and therefore we could argue that Saudi might not correct heavily after inclusion (in case oil prices are favorable and of course no new geopolitical unrest rises),” he added.

Admitting a correction was "imminent", Vrajesh Bhandari, senior portfolio manager - asset management, Al Mal Capital, said the MSCI inclusion of Tadawul will have positive implications not just for the Saudi market but for the whole region in the long run.

“With foreigners will come in more institutional participation, who are research driven and thereby bringing more discipline to the market. However, in the short term, we think the upside is limited since this is a well-flagged event and investors discount the obvious,” he noted.

Billions in passive inflows

Meanwhile, the MSCI inclusion is expected to spark huge fund inflow.

Kassabieh said that MSCI's seal of approval will attract foreign inflows worth billions of dollars which in turn will push stocks higher and trigger further market activity and growth.

“This will begin to exhibit in growing foreign ownership percentages which is of course aligned with the Kingdom’s vision towards easing access to foreign investors.”

Lakhotia estimated the total passive flows from MSCI to be between $10 and $12 billion, while Bhandari put the inflow number at $14.4 billion.

In March, Khalid Al Hussan, chief executive officer, Tadawul, estimated the passive inflows from MSCI at $10 to $11 billion.

Blue chips to gain

When asked which shares are likely to gain following MSCI’s first tranche inclusion, the analysts unanimously agreed on large-cap stocks.

A number of banks are expected to see positive momentum, such as Al Rajhi and National Commercial Bank, in addition to petrochemicals such as Saudi Kayan, stated Kassabieh.

Lakhotia believed index names would obviously benefit more, as has been the case till date over past two quarters where most index names have been outperforming the peers.

“As investors take stock post the event, bottom-up stories with good fundamentals would be in focus. We see large caps to be fully valued, but some interesting ideas in the midcap space,” Bhandari concluded.

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