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Saudi could see $30 billion to $45 billion of inflows in coming two years

Saudi won classification as an emerging market status as of March 2019 by FTSE Russell, a major index compiler, a key step toward the kingdom’s goal of drawing billions of dollars in stock investor inflows.

This is good as Saudi Arabia is struggling with rising US rates as it tries to strike a balance between boosting growth and averting capital flight that would put pressure on the riyal’s currency peg.

The classification by the FTSE Emerging Index, a component of the Global Equity Index series, will breathe more life into foreign investments, but what does all this mean?

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Saudi joins a category that already includes China, Russia, and India, as the kingdom will have a 2.7% weighting in the compiler’s main emerging market stock benchmark, FTSE said.

“Saudi Arabia is to be congratulated on the pace of the recent market reforms,” said Mark Makepeace, FTSE Russell’s chief executive officer.

Should Saudi Arabia list the full 5 percent of Saudi Aramco on Tadawul, the projected weighting of Saudi Arabia within this would increase to 4.6%, according to Financial Times (FT).

According to Bloomberg, FTSE’s decision is one of two watershed index announcements the kingdom’s regulators — and the markets — are awaiting. MSCI Inc. is expected to announce its decision in June.

Tadawul is trying to turn its almost $500 billion stock market into a gateway for foreign investment, as the Saudi Aramco IPO looms on the horizon.

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Sarah Al-Suhaimi, the chairwoman of the Riyadh bourse, known as the Tadawul, said in an interview in New York before the announcement that conversations with investors have been positive, and that the FTSE inclusion could draw about $3 billion of investments to the kingdom,” said Bloomberg.

“The Tadawul All Share Index has climbed almost 10% this year, An exchange-traded fund focused on Saudi stocks has advanced almost 9% in March.”

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Passive and active investments

The FTSE designation could prompt inflows of about $5 billion from passive investors tracking the index, according to estimates by Mohamad Al-Hajj, an equities strategist at the research arm of EFG-Hermes Holding, telling Bloomberg.

“If MSCI follows suit in June, a further $10 billion could pour into Saudi stocks,” he added.

According to FT, the kingdom’s capital market authority and its domestic Tadawul exchange have introduced some measures to make it easier for foreigners to invest by enhancing access, efficiency, corporate governance, and transparency.

“If MSCI also decides in June to categorize Saudi Arabia as an emerging market, Tadawul could see foreign fund inflows exceeding $40bn,” said FT.

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“But there are questions about its robustness and ability to handle a listing of this size.”

It said Tadawul has yet to receive “advanced” emerging market status, whereby it would need to improve regulations surrounding minority shareholders, while currency and equity markets also need to be developed further regarding liquidity and access.

According to Reuters, a lot more new money could come from “active” funds.

“All told, Saudi Arabia could see a total of $30 billion to $45 billion of inflows in the next two years if it reaches the foreign ownership levels of markets in the neighboring UAE and Qatar,” Reuters said of EFG Hermes reporting.

“Reaching the levels of Mexico and Russia would mean $90 billion of inflows.”

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Most appealing stocks to Buy?

Foreign investors were net buyers of Saudi stocks every week this year, according to data provided by the stock exchange and compiled by Bloomberg.

“As of March 22, foreigners were net buyers of $1.7 billion,” said Bloomberg.

“Still, they represent less than 5 percent of total ownership of Saudi shares.”

Bloomberg warned that stocks in Riyadh trade at more expensive valuations than their emerging markets peers.

“Their average estimated price-to-earnings ratio was close to 14 times this week, compared with 12 times for members of the MSCI Emerging Markets Index.”

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“Chemicals and steel manufacturer Saudi Basic Industries Corp. and Al Rajhi Bank would be the companies likely to draw the strongest interest from investors abroad, according to EFG-Hermes’ Al-Hajj.

Bloomberg provided Al Hajj’s 10 stocks that he estimates will see the greatest inflows:

Company Estimated flows ($ million)
Sabic 703
Al Rajhi Bank 603
National Commercial Bank 450
Samba Financial Group 258
Saudi Telecom Company 262
Riyad Bank 206
Saudi Arabian Mining Co. 212
Almarai 195
Bank Saudi Fransi 169
Alinma Bank 148