Tadawul's FTSE inclusion will lead to inflows of $3 bln: NCBC

The potential inclusion of Saudi Stock Exchange (Tadawul) in two FTSE benchmark indices this year is expected to result in fund inflows of $3 billion over time, NCB Capital said in its latest report.

Saudi Arabia is on the watch list for inclusion in the FTSE Emerging Markets index, on which a decision is expected by the end of this month. The index, which covers 992 stocks across 23 countries, has a free float market cap of $5,165 billion.

Inclusion in the EM index also means that the Kingdom will be part of the FTSE Global All Cap index, which has a free float market cap of $52,424 billion, as well as several other FTSE indices.

Tadawul’s inclusion in these two benchmark indices alone is likely to result in inflows of $3 billion over time, NCBC said, adding that an EM upgrade “would be expected to result in flows from passive investors, at the earliest, in September 2018, of $2.3 billion.”

Since being placed on the watch list for inclusion in September 2015, Saudi Arabia has undertaken several key market reforms, such as changing the settlement period to T+2 from T+0, reducing the qualifications requirements for QFIs, amending foreign ownership limits, and moving to IFRS accounting standards. The reforms have been acknowledged as positive by FTSE.

“As a result, it is anticipated that Saudi will meet the requirements for inclusion as a secondary emerging market from early 2018 and its status will be reviewed in March 2018,” the report noted.

Meanwhile, NCBC said that an alternative scenario was a “gradual” upgrade.

“Investors benchmarked to the FTSE Emerging Markets index are mainly passive. Therefore, those investors would not enter the market until the implementation of the upgrade,” it added.

At a country level, the FTSE Saudi Arabia Index is expected to have 45 Saudi stocks, excluding 34 Saudi small caps that are part of the FTSE Saudi Arabia All Cap Index.

“This is a preliminary list and FTSE might add or delete stocks at the review,” the report said.

It added that the majority of incoming funds will flow into the top 10 large-cap stocks, which have a combined market cap of SAR 1,022 billion and together represent 59 percent of the Tadawul market cap.

The top 10 list includes SABIC, Al Rajhi Bank, NCB, STC, Samba, Maaden, Almarai, Riyad Bank, Saudi Electricity and Alinma Bank, NCBC added.