Saudi stock exchange now full MSCI member, but market euphoria may fade

RIYADH: The Saudi Stock Exchange (Tadawul), the region's largest market, has completed the second and final phase of joining the MSCI Emerging Markets Index, raising its weight on the closely monitored index to 2.8 percent.

Its inclusion has generated foreign inflows worth billions of dollars since the start of the year and has helped the Saudi index make double-digit gains. Those benefits may fade as trading wanes amid gloomy economic conditions.

"Full inclusion in the MSCI Emerging Market Index represents an important milestone in advancing the Saudi capital market and further opening Tadawul to international investors," Khalid al-Hussan, Tadawul's chief executive, said in an exchange filing on Thursday.

From the start of 2019 through July 31, trading activity of foreign investors totalled $56 billion, representing 21% of total trading, according to the filing. Foreigners have been net buyers every month this year, sending the Saudi index up nearly 20% at its peak in May.

Since then, however, geopolitical and trade tensions have reduced the index's year-to-date gains to 2.5%. Aanalysts expect the gains to dwindle.

"We expect oil prices to remain low, the Saudi economy to weaken further and global risk appetite to worsen, all of which will act as headwinds to equity prices," Capital Economics said in a research note.

FURTHER INFLOWS?

The Saudi kingdom opened its stock market to foreign investors in 2015. It has since introduced a raft of reforms to make it attractive to foreign investors and issuers and to expand its institutional investor base, as part of an ambitious plan to diversify the economy away from hydrocarbons.

Hussan had told Reuters in March that Saudi listed companies could see holdings by foreign investors rise to 10% when shares are fully included in MSCI and FTSE indices. Foreign ownership now is around 8%.

"International investors have already committed around $18 billion to Saudi equities so far this year, primarily from MSCI and FTSE trackers as well as Saudi dedicated ETFs," said Antoine Maurel, MENAT head of global markets at HSBC.

"We still except to see significant further inflows in the months ahead as foreign ownership of the Saudi stock market remains below its emerging market peers at less than 5%, excluding strategic holdings," he said.

MSCI upgraded Saudi Arabia from a "Standalone Market" to "Emerging Market" in June 2018. Saudi stocks were phased into the index in two tranches with a 50% inclusion factor for each, with the implementation of the first tranche taking place on May 28 and the second on August 28, 2019.