Saudi Tadawul begins collaboration with foreign index providers

A flood of foreign investment into the kingdom is exactly what Riyadh wants as it pursues reinventing its oil-based economy.
Sunday 10/02/2019
An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul)  in Riyadh,  June 29, 2016.                   (Reuters)
New dynamic. An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, June 29, 2016. (Reuters)

WASHINGTON - Saudi Arabia’s equity and debt markets are expecting to score large foreign investment gains because of a boost from three major international index providers.

Steps in recent years by the Saudi government to meet stringent criteria required by other indexes are likely to pay off for Riyadh when foreign portfolio investments begin tapping into Saudi markets.

A collaboration between the Saudi stock exchange and top index provider Morgan Stanley Capital International (MSCI) was recently introduced, providing global investors with exposure to Saudi Arabia’s largest publicly traded companies. Beginning in March, the Saudi stock market will join FTSE Russell Emerging Market Index (EM), requiring equity funds that benchmark themselves against that index to buy Saudi stocks.

A flood of foreign investment into the kingdom is exactly what Riyadh wants as it pursues reinventing its oil-based economy, particularly after seeing direct foreign investment in the kingdom drop by as much as 80% from 2016 to 2017.

One of the biggest beneficiaries is likely to be the Saudi stock exchange — Tadawul — which the Saudi government hopes to strengthen and expand to play a pivotal role in Riyadh’s privatisation efforts, including the much-anticipated initial public offering of Saudi state oil firm Saudi Aramco.

On January 30, MSCI and Tadawul established the tradable MSCI Tadawul 30 Index, which includes the 30 largest securities listed on the kingdom’s domestic bourse. The index provides investors with a benchmark of the kingdom’s largest liquid stocks and serves as the basis for the development of an index futures contract listed on the Saudi stock exchange, MSCI and Tadawul said.

The MSCI Tadawul 30 Index can be licensed for other index-linked financial instruments, including mutual funds and derivatives. Tadawul CEO Khalid al-Hassan said the index is “a significant step forward in facilitating the creation of a derivatives market for Saudi Arabia and advancement of the Vision 2030 Financial Sector Development Programme.”

The MSCI Tadawul 30 Index is to be rebalanced four times a year. A total of 25-35 securities would be included, changing according to market conditions.

The index is believed to include such heavyweights as Saudi Basic Industries Corporation (SABIC), National Commercial Bank, Saudi mining firm Maaden and the kingdom’s largest dairy company, Almarai. The index will undoubtedly add Saudi Aramco to the mix when the energy conglomerate’s limited share sale occurs.

Regional investment bank EFG Hermes estimated that the kingdom’s inclusion into leading EM indexes would propel total foreign inflows of $30 billion-$45 billion into Saudi Arabia, with approximately $14 billion associated with “passive” index-linked funds. That can only be positive news for the country’s domestic exchange.

Hassan said one of the government’s goals is to double the exchange’s market capitalisation to more than $1 trillion by 2022.

Saudi Arabia this year is to enter into three global benchmark indexes — the FTSE Russell EM index, the MSCI EM index and the J.P. Morgan EM government bond indexes. These inclusions should have a dramatic and immediate effect on the Saudi financial landscape, said Mohammed el-Kuwaiz, chairman of the Saudi securities regulations agency, Capital Markets Authority.

“We believe it is going to change the market quite markedly. We are actually quite excited to see how this will change the market dynamic, increase the depth, increase institutionalisation,” Kuwaiz said at the World Economic Forum.

He indicated that foreign investors would ultimately be able to own more than 50% of Saudi companies.

The kingdom is to enter the FTSE Russell EM index in several stages, beginning in March and concluding in December.

“Saudi Arabia’s inclusion in the FTSE benchmark is the largest event in the emerging markets since 2001 and an important development for global investors,” said FTSE Russell CEO Mark Makepeace.

MSCI, which changed its classification for Saudi Arabia to EM status last June, is expected to phase the kingdom into its EM index in two stages beginning this June. The MSCI EM index consists of 24 countries reflecting 10% of world market capitalisation. The kingdom’s entry into the MSCI emerging market index could produce as much as $10 billion of “passive” inflows into Saudi equities.

In October, J.P. Morgan announced that Saudi Arabia would enter its EM government bond indexes in 2019, with Riyadh being phased in between January 31 and September 30. The Saudi Finance Ministry issued a statement at that time stating that its debt management office anticipated $11 billion of inflows into the country’s debt market as a result of Riyadh’s inclusion in the J.P. Morgan indexes.