Is Saudi Arabia The Next Hot Investment Opportunity?

Time: July 06, 2018

Saudi Arabia’s addition to indexer MSCI‘s (MSCI) group of emerging markets starting in June 2019 is expected to lure $40 billion in foreign investment to that country. Now, U.S. investment firms are looking to get in on the action.

Franklin Templeton Investments, a longtime active asset manager, is seeking approval for a Saudi Arabia ETF, according to a filing with the U.S. Securities and Exchange Commission on June 22.

Currently, there’s only one such fund, iShares MSCI Saudi Arabia (KSA). It has about $269 million in assets, a figure that’s ballooned by as much as 1,700% this year, the most among all single-country funds. This comes at a time when investors are pulling billions from broad emerging-market funds and investing in single-country ETFs.

“For Saudi Arabia and the region, this is a great opportunity to move into the limelight of international foreign investors, and to attract inflows,” said Michael Bolliger, the head of emerging-market asset allocation at UBS Wealth Management’s (UBS) chief investment office.

The 20 countries promoted to MSCI emerging-market status since 1994 had a median return of 55% in the year before official inclusion, according to Bassel Khatoun, managing director for frontier and MENA, and Salah Shamma, head of investment for MENA, at Franklin Templeton Emerging Markets Equity.

Price War?

It’s unclear how Franklin’s fund will differentiate itself from KSA or what it will charge investors. But when the firm made its passive ETF debut in November by launching 16 single-country funds, it clearly tried to undercut rival BlackRock (BLK). Franklin charges less than $1 for every $1,000 invested in its developed single-country ETFs and $1.90 for emerging-market funds, while BlackRock charges at least $4.80 for developed markets ETFs and $6.20 for EM funds.

Two weeks ago, foreign investors jumped at the opportunity to invest in Saudi Arabia when Invesco (IVZ) issued the first European ETF to track the country’s shares in expectation of MSCI upgrading the country’s status.

This article was first published in INVESTOR’S BUSINESS DAILY

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$45bn in capital inflows to Saudi after MSCI emerging markets inclusion

Time: July 01, 2018

MSCI’s recent move to include Saudi Arabia on the MSCI Emerging Markets index will attract “significant” capital inflows of $45 billion to the kingdom, according to UBS Global Wealth Management’s chief investment office.

According to UBS, the inclusion should translate into $10 billion from passive and $35 billion from active investments, in addition to $5 billion in inflows stemming from rival index provider FTSE’s recent inclusion of Saudi Arabia on its own Emerging Market benchmark.

In a statement, UBS noted that potential IPOs and an increased quota for foreign investor holdings might trigger additional inflows in coming months, with the market supported by fundamentals including higher energy prices and an ongoing recovery of corporate earnings.

Long-term risks

However, UBS also identified a number of long-term risks for investors, including the possibility of renewed oil price weakness affected the kingdom’s fiscal and external balances as well as geopolitical tensions in the wider region.

“While we expect a short term increase in Saudi Arabia’s performance following the MSCI inclusion, we also advise investors to keep an eye on fundamentals,” said Michael Bolliger, head of EM asset allocation, UBS Global Wealth Management, chief investment office.

“Diversification is elementary for the country’s long-term economic success and the current momentum should be used to channel foreign direct investment into a range of strategically relevant sectors, which is a key objective of the Saudi Vision 2030.”

This article was first published in Arabian Business

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Balanced Saudi Stocks Performance Helps Attract More Investments

Time: June 26, 2018

Three trading sessions, which followed the MSCI announcement on upgrading the Saudi shares market to the emerging global markets last week, have shown highly balanced performance by the Saudi stock market.

The market made strong gains during trading beginning of this week amid expectations that Saudi bourse joining the MSCI emerging market index would positively impact trading in the coming period.

The decision is expected to expand liquidity base in the Saudi bourse and allow the listed firms to compete on developing operational performance and achieving qualitative gains that give an added value to investors.

In this context, the Saudi shares index closed Monday’s trading at 8,342 points amid trading total value of around SAR3.23 billion (USD861.1 million).

HSBC Saudi Arabia said that after Tadawul, as the exchange is known, was granted inclusion by MSCI into the index provider’s Emerging Markets benchmark, the stock market would attract more investors.

Majed Najm, CEO, HSBC Saudi Arabia said he was delighted with this decision that reflects the efforts being exerted by the Capital Market Authority of Saudi Arabia and Tadawul.

The MSCI inclusion would lure investors to the Saudi market, he added.

This article was first published in Asharq Al-Awsat 

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Saudi upgrade to MSCI EM index to attract liquidity to region

Time: June 22, 2018

Analysts say MSCI inclusion to increase fund flows to Gulf, raise weight of Gulf on EM index

Dubai: The inclusion of Saudi Arabia’s equity index in the MSCI Emerging Markets index is expected to attract billions of dollars’ worth of new investments into the Kingdom’s markets as well the broader Gulf markets.

Analysts said the upgrade to Emerging Market (EM) status is a “huge win for its capital markets,” and that it increases the weight of Gulf markets in the MSCI emerging market index.

“Looking at the GCC and Mena (Middle East and North Africa) regions more broadly, we think that the MSCI decision to upgrade Saudi Arabia will prove a transformative catalyst for exchanges amid rising global investor interest,” said Salah Shamma, head of investment for Mena at Franklin Templeton’s emerging markets equity.

“With improving fundamentals such as positive corporate earnings, higher oil prices, and non-oil GDP (Gross Domestic Product) growth, we believe a re-rating of regional markets is also warranted.”

Index provider MSCI on Thursday said it will include Saudi Arabia in its EM index starting from June 2019, attributing the upgrade to Saudi’s implementation of a number of regulatory and operational enhancements.

MSCI said Saudi Arabia will represent a weight of around 2.6 per cent of the index. MSCI’s indices are used by investment funds around the world, with around $1.7 trillion (Dh6.2 trillion) worth of funds benchmarked against its EM indices.

“Saudi has very low foreign ownership — less than 2 per cent of market cap, and hence, the upgrade has the potential to create around $30 billion of active and passive inflows into Tadawul by August 2019,” said Aarthi Chandrasekaran, vice president at Shuaa Capital.

“Overall, Saudi’s inclusion is positive for the region, as GCC weights in MSCI-EM have inched up significantly, and will be difficult to ignore by the global fund managers.”

This article was first published in Gulf News

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Saudi MSCI inclusion will raise foreign stock ownership and boost inflows

Time: June 20, 2018

The expected inclusion of Saudi Arabia in MSCI’s emerging market index could boost foreign stock ownership to above 10 per cent of market capitalisation and drive inflows of upto $40 billion by end-2019, analysts said.

“If Saudi follows frontier and emerging market peers then the amount of the market owned by foreigners could, over a few years, rise to about 10 per cent,” said Hasnain Malik, managing director of equity strategy at emerging market-focused investment bank Exotix Capital.

Foreign ownership, which currently is less than 2 per cent, could rise to upto 12 per cent by the end of 2019, said Mohamad Al Hajj, vice-president and head of Mena equity strategy at lender EFG Hermes.

Index compiler MSCI is to announce whether or not it will grant Saudi Arabia emerging market status on Wednesday, after the kingdom was put on a watchlist for inclusion last year.

The MSCI promotion would follow a similar move by FTSE Russell in March and be a second achievement for the kingdom, which has been implementing a series of reforms to develop its capital markets in line with its Vision 2030 economic diversification strategy.

MSCI EM status would help the country attract billions of dollars into the Middle East and North Africa’s biggest stock exchange, which has a market capitalisation of about $500bn.

“The FTSE Russell decision in March was an important achievement for the kingdom, but it is the MSCI upgrade that will truly help catalyse its Vision 2030 efforts,” said Salah Shamma, head of Mena Investment at Franklin Templeton Emerging Markets Equity.

“Since MSCI added it to its watch list in June 2017, the necessary infrastructure has been upgraded and we believe all required criteria have been met.”

The decision would “ultimately help transform the kingdom into one of the largest and most attractive emerging markets in the world,” he added.

Investment manager Franklin Templeton estimates the kingdom’s inclusion in the MSCI EM index would bring additional flows of around $35bn into the market. Around $3bn in foreign flows have already come into the Saudi market in 2018, taking total foreign investment in the Tadawul stock exchange to approximately $9bn. The potential listing of a five per cent stake in Saudi Aramco, the world’s biggest oil producer, would add another $50bn in foreign flows depending on valuation, Franklin Templeton said.

Mr Al Hajj said he expected additional inflows of between $30bn-$45bn into Saudi Arabia by the end of 2019 as a result of the anticipated upgrade. His estimate does not include the impact of an Aramco listing. “From this year, stronger US dollar and rising US rates could continue to attract buyers, especially for Saudi banks,” he said.

Meanwhile, Rami Sidani, head of Mena investments at Schroders Investment Management, estimated additional inflows of $20bn by the middle of next year if Saudi Arabia is included in the index. “Market performance has been very strong since the beginning of 2018, and, with MSCI inclusion along with an improving Saudi economy, we expect the market to outperform other emerging markets,” Mr Sidani said. MSCI EM status would be “game changing” not just for the kingdom but the entire region, he added, positioning it as a centre for foreign capital.

Saudi Arabia’s Tadawul stock exchange is up by about 15 per cent year-to-date on anticipation of inclusion in the emerging markets benchmarks.

“Higher oil prices, continuing evidence of positive economic reform, foreign inflows and insulation from the currency concerns buffeting other emerging markets should all drive the Saudi equity market higher this year,” added Mr Malik.

This article was first published in The National

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Saudi leads top Arab listed companies, UAE leads top ranking private firms

Time: June 19, 2018

With oil prices recovering steadily, it has been a good year for businesses across the region.

Stock market performance is often seen as a barometer of an economy and most of the region’s bourses have seen increases in their indices last year.

Tadawul, the stock market of the Middle East’s biggest economy, has seen a growth of over 10% year to date.

Some of the key reforms that most governments in the region are trying to implement are to reduce reliance on the public sector as a main economic driver and promote more private sector involvement.

Factoring these into their calculations, Forbes Middle East presents the top companies in the Arab region, which also includes the top 100 Listed and 50 top Private Companies in the Arab World 2018.

Companies in the region have seen significant growth with all four metrics that Forbes tracks—namely revenues, profits, market value and total assets—seeing steady growth.

Total assets of Forbes’ top publically listed companies have increased by $200 billion to $2.9 trillion.

Saudi Sabic tops this list, and kingdom companies occupy nearly a third of the Top 100 Companies listed on Tadawul.

This article was first published in AMEinfo

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Saudi Arabia’s emerging market upgrade explained

Time: June 17, 2018

I am sure most of you have already heard about the MSCI EM upgrade for Saudi Arabia, but do you actually know what is it really, what does it measure and why all the people have been eagerly waiting for it?
The MSCI Emerging Markets Index is one of the most popular indices created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 23 emerging economies
Saudi Arabia’s Tadawul Index is not only the region’s largest equities market, but also one of the most diverse, consisting of close to 180 stocks across a range of sectors making it more representative of the real economy compared with regional peers.
As part of its capital market reforms, the Saudi Capital Market Authority (CMA) has opened its equity markets to foreign direct investments in June 2015 through a Qualified Foreign Investor (QFI) program. To make access easier, it reduced the minimum assets under management for QFIs to $500 million from $1 billion and added new types of eligible QFIs, such as sovereign wealth funds and university endowments.
To attract more foreign investors, foreign ownership limits have been raised from 20 percent to 49 percent since September 2016. To further align Saudi Arabia’s capital markets with international standards and to increase transparency and liquidity, the country transitioned to a T+2 settlement cycle, from T+0, for all listed securities and also introduced securities borrowing and lending and covered short selling.
In recognition of Saudi Arabia’s capital market reforms and continued enhancements, MSCI announced it would consider the MSCI Saudi Arabia Index for inclusion in the MSCI Emerging Markets Index, and is expected to communicate its decision on Wednesday 20th June 2018.
But what could potential inclusion mean for Saudi Arabia? Such upgrade will greatly benefit our country in many aspects. The most direct benefit is increased capital inflows. The MSCI EM Index has $1.9 trillion worth of assets benchmarked against it. Inclusion on the index would not only increase the exposure of Saudi stocks to international investors, but also will lead to passive inflows from funds that follow its progress.
The Saudi Central Bank (SAMA) last year issued series of measures to address the lack of liquidity, including discounting lending rates. While the picture has improved, it had slid back by the end of Q1 this year, reducing the ability of banks to lend money. Capital inflows with an MSCI listing will substantially boost liquidity in the economy. Moreover, the inclusion will increase trading volumes by reducing the equity risk premium and so draw in new investors from around the world.
I believe that Saudi Arabia’s growing importance on the world stage will undoubtedly help it to diversify its investors’ base and capital sources, as well as open its market to large institutional foreign investors which have so far been relatively restricted.

Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.

This article was first published in Arab News

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MSCI Win Bets Make Saudi Stocks Even Pricier Than New Peers

Time: June 12, 2018

Emerging-market investors need increasingly deeper pockets as they prepare to add stocks from the region’s largest exchange.

Saudi Arabian shares have climbed 14 percent this year, partly as foreign investors bet the country will win upgrades to emerging-market status, which they expect to trigger billions of dollars of inflows from funds tracking global benchmark indexes. The buying has pushed the capitalization of Riyadh’s market beyond that of South Africa in dollar terms for the first time in 11 months. As the gains pile up, Saudi stocks have become increasingly more expensive than the group the country is poised to join.

Saudi Arabian shares have historically traded at a premium to the average for emerging markets, with access largely restricted to local investors until three years ago. But Saudi price-to-earnings estimates for the next 12 months are near the widest gap over developing countries since 2015. Index compiler MSCI Inc. will announce a decision on whether to add the kingdom to its emerging-markets indexes on June 20, while FTSE Russell made the call in March and will implement it next year.

“After the recent rally, I’d be cautious on going into Saudi on a broad basis,” said Osama Alowedi, head of investment management at GIB Capital LLC in Riyadh. “Valuations are already on the higher side, and growth potential is not so high to justify this. Dispersion in valuations is very high, especially for candidates that are expected to have large inflows from index inclusion, with many of them already trading at high levels.”

While expectations around the results of index inclusion are widely positive, the optimism isn’t matched in the Saudi economy. Gross domestic product shrank 0.7 percent in 2017, mainly as oil production dropped, while non-oil sectors grew 1 percent, according to the International Monetary Fund. The government is attempting to pare its budget deficit by reshaping one of the world’s most-generous welfare systems and is seeking to spur foreign direct investment that last year slumped to a fifth of 2016 levels.

Estimated price-to-earnings ratios for the benchmark Tadawul All Share Index have been above the 50-day average for most of 2018, while the same measure for the MSCI Emerging Markets Index has traded below it. Chemicals and steel manufacturer Saudi Basic Industries Corp. and lender Al Rajhi Bank, which are expected to see the biggest inflows following an MSCI upgrade as they comprise almost a quarter of the local stock gauge, both trade at more expensive levels than emerging-market peers.

“If you think about fundamentals, and you see where the market is trading, investors should be a lot more selective and go for bottom-up names,” said Alowedi. He remains bullish about banks, “where valuations are still attractive,” and about consumer stocks, set to benefit from a recovery in household spending.

Investors also need confidence that Saudi companies can achieve the ambitious earnings expectations set by analysts, to justify paying current share prices. While analysts have been cutting their average earnings estimate for Saudi companies over the past month, after sending it to a two-year high in early May, it remains higher for the year and that may be too optimistic.

Saudi companies haven’t met profit estimates for at least a decade, according to data compiled by Bloomberg. Yet, current projections require a 26 percent jump in earnings by June 2019. The Tadawul All Share Index fell less than 0.1 percent as of 10:20 a.m. in Riyadh Tuesday.

As markets anticipate an MSCI upgrade, “valuations have gone so much ahead of fundamentals,’’ Aarthi Chandrasekaran, vice president at Shuaa Capital, said in an interview with Bloomberg TV. “I’m sure there will be a cool-off period post the decision announcement, when valuations will start catching up more with reality on the ground.’’

— With assistance by Tracy Alloway, and Yousef Gamal El-Din

 

This article was first published in Bloomberg

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