Saudi Arabia's stock market surged on Monday after a regulatory official was quoted as predicting the bourse would enter MSCI's emerging market index sooner than most investors had expected, while the rest of the region was subdued. Mohammed El-Kuwaiz, vice chairman of the Capital Market Authority, was quoted as saying by the Asharq al-Awsat newspaper that he expected the Saudi market to be included in the index by the end of 2018.
MSCI will announce late on Tuesday whether it is putting Saudi Arabia on a list for possible index inclusion. Most funds think Riyadh has done enough to be included, but if MSCI follows its usual timetable, actual entry would occur in mid-2019. However, MSCI has the flexibility to move faster if it wishes. The Saudi stock index rose 2.4 percent, its largest single-day gain since November, although trading volume was only moderate. "Local funds which have been somewhat sceptical of MSCI putting Riyadh on review reacted to the comments made by the vice chairman," said Mohamad al-Hajj, macroeconomic strategist at EFG Hermes.
Some of the top-performing shares on Monday were those which may eventually be added to MSCI's standard emerging market index, including Banque Saudi Fransi, which jumped 7.5 percent, and medical insurer BUPA Arabia, up 6.0 percent. Although progress towards inclusion would be a net positive for the Saudi stock market, some analysts are cautious about speculative fever trumping fundamentals, which are not particularly supportive. Saudi Arabia's 12-month forward price-earnings ratio is 13.9 while the MSCI Emerging Market Index is at 12.
"While we believe that inclusion in watch list for Saudi will lead to enhanced market liquidity and generate more interest in the Saudi market, we caution investors to be wary of irrational exuberance as inclusion is unlikely to change market fundamentals which currently remain tepid," said a note by Alrajhi Capital.
The government's petrodollar revenues remain under pressure and reforms planned for the next 12 months include another round of fuel and electricity price hikes and introduction of a value- added tax, which will raise costs for the private sector. Meanwhile, Dubai's National Central Cooling Co (Tabreed) surged its 15 percent daily limit to 2.12 dirhams after French power and gas group Engie agreed to buy a 40 percent stake for 2.8 billion dirhams ($763 million) from Abu Dhabi's Mubadala.
Mubadala will convert its mandatory convertible bonds into shares, with 1.086 billion shares to be transferred to Engie at about 2.62 dirhams each. The Abu Dhabi fund will keep 42 percent after the deal has been approved by regulators. Analysts at Arqaam Capital said they were keeping their target price for the stock unchanged at 2.32 dirhams, as Tabreed's growth would benefit from Engie's experience but share buy-backs by the company were no longer likely.
Drake & Scull climbed 1.2 percent after its acting chief financial officer told reporters that the company had not been affected by Qatar's diplomatic rift with some of its Gulf neighbours, although DSI was not bidding for new business in that country. DSI expects to complete a plan to reduce its capital by 75 percent by the end of the third quarter, deferring the process by one month, its chief executive said.
The Dubai index added 0.4 percent. Qatar lost 1.3 percent with commodity-linked companies some of the worst performers as Brent oil stayed near its 2017 lows. Drilling rig provider Gulf International Services declined 4.0 percent and petrochemical maker Industries Qatar fell 2.7 percent. Abu Dhabi's index edged down 0.2 percent, weighed down by a 2.9 percent decline in Dana Gas, the most heavily traded stock on Monday.
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