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$16 billion in passive income to flow to Saudi Tadawul

Saudi stocks joined the FTSE Russell Emerging Markets Index on Monday, while foreign investors spent hugely on Saudi shares as Tadawul’s upgrade begins in earnest.

Investment inflows resulting from FTSE inclusion, and later MSCI in May 2019, are expected to boost liquidity and trading in Saudi Tadawul already among the most liquid of emerging markets globally.

The inclusions will run in phases over the next year or two. The FTSE integration is split over five tranches and will be completed by March 2020, while an upgrade by MSCI Inc. will happen in two stages later this year, according to Bloomberg.

Where are future investments coming from?

ETFs’ A game

The kingdom's stock market was also added to several emerging market and global benchmarks run by S&P Dow Jones.

The inclusions in prominent emerging market indexes will clear the way for investors to plough more cash into Saudi Arabia. Passive money, mainly in the form of ETFs, is especially sensitive to these classification changes, according to CNN.

"It provides a seal of approval that means a lot to institutional clients," Erik Zipf, head of emerging markets equities at DuPont Capital, an asset manager owned by DowDuPont (DWDP) that controls $27 billion, told CNN.

About $15 billion is expected to flow into Saudi Arabia's stock market from passive investors alone once the kingdom is fully included in the FTSE Russell and MSCI benchmarks, according to Tadawul, the Saudi stock exchange.

"The inclusion into these pre-eminent indices is a testament to growing investor confidence in the Saudi market and reflects the successful implementation of far-ranging capital market reforms," Khalid Al Hussan, CEO of Tadawul, said in a statement.

The iShares MSCI Saudi Arabia ETF (KSA) fell sharply last fall but has since rebounded. The ETF is up 12% so far in 2019.

Buyers ahead of inclusion

Foreigners were net buyers of about 1.6 billion riyals ($427 million) of stocks in the five days through March 14, more than any other week since the data were first disclosed in 2015, according to Bloomberg.

The inflows picked up as FTSE Russell begins to include the country in its emerging-market category on Monday, attracting fund managers that follow the indexes passively.

Qualified foreign institutional investors, who were first allowed to directly access the Saudi bourse in 2015, were the leading category of purchasers, it said.

The Tadawul All Share Index rose 1.1% on Monday, the most in almost six weeks, to end at the highest level since August 2015.

“We haven’t seen any turbulence on inflows of cash for the first tranche of FTSE and it was very smooth by both the sellers and as well as the buyers, which in my opinion confirmed the confidence of international investors to participate in the Saudi markets and the regulatory framework of the Saudi capital market,” al-Hussan said.

Monday’s initial tranche of 25% “will be split over March 2019 and April 2019 (10% and 15% respectively) to ensure a smooth transition,” according to a Tadawul press release as reported by CNBC.

The Tadawul index is up 9.4% since the start of this year, CNBC said.