Saudi Arabia has attracted $10.8 billion (Dh39.6bn) in equity investment inflows so far this year, as foreign investors increased their exposure to Arab world’s largest bourse ahead of its inclusion into the MSCI emerging markets index, the Institute of International Finance estimated.
For the first half of the year, foreign equity inflows to Saudi Arabia were close to India and China – Asia's biggest and third-largest economies respectively – a "remarkable" achievement given that the Saudi economy is only a fraction of the two states, IIF said.
The spillover of foreign investments was also evident in neighbouring countries, as foreign equity inflows rose in the UAE and Qatar, the IIF's Middle East and North Africa chief economist, Garbis Iradian, said in the latest report on Saudi equities market. "We expect Saudi Arabia to continue reaping the benefits of the capital markets reform and the inclusion in global indices," he said.
Early position of foreign investors to include Saudi stocks in their portfolios was relatively slow since the announcement last year of the MSCI inclusion, as factors including high valuations of Saudi-listed companies, kept some of them on the sidelines. However, investors, it seems, have "shrugged off concerns in the past few months, and were it not for global trade conflict and regional security concerns, inflows to Saudi Arabia would have been even higher", Mr Iradian said.
In February, the IIF estimated passive equity inflows into the kingdom to reach $12bn this year. In the absence of major domestic and external shocks and given Saudi Arabia’s allocated weight, potential allocation from active investors could reach up to $40bn in coming years.
The IIF projections are in line with those of Moody's investors Service, which earlier this month said the MSCI inclusion of Saudi equities is expected to attract as much as $40bn to the market and will be credit positive for its asset managers.
The phased addition of Saudi Arabia to the index gives its stocks a representative weighting on a pro forma basis of approximately 2.6 per cent of the index with 32 securities, MSCI said.
Saudi Stock Exchange, or Tadawul, a market with almost half a trillion dollars in capitalisation, has also been included in emerging market benchmark indices of global index provider FTSE and S&P Dow Jones. These indexes are widely tracked by global investors that manage trillions of dollars in investments. MSCI EM Index has funds with assets under management in excess of $1.9 trillion benchmarked to it alone.
The surge in the capital inflow into Saudi Arabia stands in sharp contrast to other emerging markets, Mr Iradian said.
After a positive performance in March and April, renewed trade tensions between the US and China triggered a sharp decline in equity flows to most emerging markets. May was the worst performing month for equity flows into these markets since the "taper tantrum" of June 2013, according to IIF's Capital Flows Tracker.
Total equity outflows from emerging markets amounted to $14.7bn in May, half of which came from China. In contrast, Saudi Arabia received more than $4.5bn in foreign equity inflows during the same period, making it the top equity investment destination among emerging markets, Mr Iradian added.
Equity markets usually rally after upgrade announcements by index providers but retract after the inclusion becomes effective, a pattern seen for other countries whose markets were promoted to MSCI emerging market status. While Saudi Arabia has shown a similar increase after the MSCI announcement, "there is reason to think that a major correction will not necessarily occur" as the Saudi market is bigger and more liquid compared to other markets in the region that have joined the MSCI EM index in recent past, Mr Iradian said.
