Saudi shares-index upgrade likely to ‘turbocharge’ private sector growth

An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh. (Reuters)
Updated 17 June 2018
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Saudi shares-index upgrade likely to ‘turbocharge’ private sector growth

  • $2 trillion in global emerging market funds
  • Saudi bluechips set to gain from inflows

Investors are expected to pump billions into the Saudi bourse, known as the Tadawul, if the Kingdom is included in the key MCSI-emerging markets index in 2019. The decision is expected on Wednesday.
Analysts interviewed by Arab News gave a unanimous thumbs up to KSA’s widely anticipated inclusion that will see huge US “trackers” run by the likes of BlackRock and Vanguard, sign off on multi-billion dollar cheques on behalf of investors in their pension, insurance and savings funds in North America and elsewhere.
There is about $2 trillion in global emerging (EM) market funds, according to EFG-Hermes in Cairo, a huge pool of capital that could be tapped for future IPOs, with state-owned Saudi Aramco a prime target when it floats in what is expected be the world’s biggest listing of all time.
The macro-story is important, too.
“The positive narrative around reforms being pushed by Crown Prince Mohammed bin Salman makes for a compelling backdrop,” said Charles Robinson, global chief economist at London-based Renaissance Capital.
One of the main advantages of inclusion in the index is that it would herald “a more efficient allocation of capital” in that foreign cash would find its way to those Saudi Arabian-listed companies that offer the best prospects, said Robinson.
Currently, 95 percent of Tadawul investors are made up of smaller retail or private shareholders. But Robinson added: “You would hope that there would be an increasingly professional approach in the Saudi stock market by professional investors who are going to influence the price/earnings ratios of the better companies, pushing up their share prices, allowing them to raise more capital and therefore enabling them to become bigger companies in the future.”
Those doing less well, which currently might be attractive to retail investors, could end up getting less cash, he suggested.
The inclusion of Saudi Arabia in the MSCI EM index may help to “turbocharge” the Vision 2030 plan that aims to reduce the Kingdom’s reliance on oil, and boost the private sector, he added.
In turn, this would pave the way for greater employment of Saudi nationals, especially young people who make up a large proportion of the potential and actual workforce.
Hootan Yazhari, head of Middle East and global frontier markets research at Bank of America Merrill Lynch, told Arab News: “Global Emerging Market fund managers will effectively be forced to have a view on Saudi Arabia, especially as it will be a material part of the MSCI index (more than 2.6 percent weighting). Therefore, Saudi Arabia’s profile and awareness among fund managers globally will increase,” he said.
Others were equally enthusiastic. Mohammed Al-Hajj, Middle East equities strategist at EFG-Hermes, told Arab News that an upgrade to emerging market status meant that from 2019 Saudi Arabia would be part of global emerging market (GEM) benchmarks followed by GEM investors which he expected would lead to inflows of $30 billion-$45 billion into the Kingdom by the end of 2019 (excluding Aramco).
He said: “Ownership of Saudi businesses by foreign financial institutions is only 1.8 percent of total (Tadawul) market value versus an emerging market (EM) average of 17 percent, as such we see big potential for inflows into the country,” said Al-Hajj.
Importantly, analysts said MSCI inclusion would make the Kingdom a more sophisticated market as seasoned investors exerted greater influence on its corporates. KSA companies would be increasingly compared to international peers by investors, it was suggested, making management teams more likely to focus on improving strategy, efficiency and overall performance as they seek to compete for capital. “Accountability to shareholders will increase,” said Al-Hajj.
EFG-Hermes has highlighted the appeal of KSA-listed banks and petrochemical companies, tipping Samba, Kayan, SABB, SABIC and Al-Rajhi.
Hajj saw scope for about $10 billion of inflows to the market from passive MSCI EM index trackers and a similar amount from active managers. “With FTSE having elected to include the country in its EM benchmark in 2019, this necessitates another $6 billion of passive flows taking potential total inflows close to $30 billion.
“We see these flows providing tail winds to the market and supporting the country’s FX position,” he said.
Foreign ownership limits in KSA have been capped at 49 percent, and a few companies are fully closed to foreign investors, but the Tadawul embarked on a modernization and reform program in 2015 to make the market more transparent and accountable.
Historically, Saudi Arabian shares have traded at a premium to the average for emerging markets, but with excitement building ahead of MSCI’s decision this week, there are some concerns that stock values have become a bit too toppy.
Bloomberg said in a report that the buying had 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,” claimed the report.
As markets anticipated 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.’’
Another analyst cited by Bloomberg advised investors to be more selective and go for ‘bottom-up’ names.
There are, of course, disadvantages to being included in the index. In the good times, capital flows would pour in, but in less benign periods, outflows were possible, depressing market values, damaging sentiment and knocking balance sheets.
Timothy Ash at Blue Bay Asset Management in London told Arab News: “It’s a story about managing success: Portfolio managers, for a variety of reasons, could decide they don’t like the KSA story any more and they can leave … look at Argentina.”
Al-Hajj said: “What we have seen in previous upgrades is that multiples expand, making markets expensive on a fundamentals basis, which could make it prone to weakness (short-term) in the post-implementation period (after May 2019).
“In addition, once a market is part of EM indices it will be more prone to EM outflows and risk-off periods that lead to EM weakness.”
He also said: “However, the benefits far outweigh the negatives in our view. As the inclusion will increase the institutional share in the Saudi market, and offer companies access to funds during capital raising by Saudi companies (new listings) in the future.”
The MSCI proposal, which was laid out in a document published in February, is to implement the potential reclassification in two steps in May and August 2019.


British PM May: 'I will not break up my country for EU Brexit deal'

Updated 21 September 2018
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British PM May: 'I will not break up my country for EU Brexit deal'

  • Theresa May hits back with angry statement after EU leaders rejected May’s Chequers plan
  • Sterling plummets as both sides warn they are planning for a no-deal scenario

LONDON: British Prime Minister Theresa May said on Friday Brexit talks with the European Union had hit an impasse, defiantly challenging the bloc to come up with their own plans a day after the bloc’s leaders savaged her proposals.
At a summit in Austria on Thursday, EU leaders rejected May’s “Chequers” plan, saying she needed to give ground on trade and customs arrangements for the UK border with Ireland.
The British media said the response had left her proposals in tatters, and May angrily struck back in a televised address from her Downing Street office, saying neither side should expect the impossible from the other.
“Throughout this process, I have treated the EU with nothing but respect,” May said. “The UK expects the same. A good relationship at the end of this process depends on it.”
Sterling extended its losses as May spoke, falling to as low as $1.3080, about 1.4 percent on the day, putting it on course for its biggest one-day drop this year, over growing fears Britain could leave the EU without any deal.
May has said the Chequers proposals for trade with the EU, which would resolve arguments over the border of Northern Ireland with the Irish Republic, were the only way forward. EU leaders in Salzburg repeated their view that the plans would undermine their cherished single market.
After the summit, EU leaders said they would push for an agreement next month, but both sides have warned they are planning for a no-deal scenario.
“It’s not acceptable to simply reject the other side’s proposals without a detailed explanation and counter proposals,” May said. “So we now need to hear from the EU what the real issues are, what their alternative is, so that we can discuss them. Until we do, we cannot make progress.”
May, who commands a majority in parliament only with the support of a small pro-Brexit Northern Irish party, said she could not agree to any deal which treated Northern Ireland differently to the rest of the United Kingdom.
The EU insists that there can be no hard border between the British province and the Irish Republic, with Northern Ireland remaining in the bloc’s customs union or effectively establishing a border in the Irish Sea if no alternative deal is reached.
“I will not overturn the result of the referendum nor will I break up my country,” she said. “We need serious engagement on resolving the two main problems in the negotiations and we stand ready.”
However, she said no matter what happened, the rights of three million EU citizens living in the United Kingdom would be protected.
Earlier, her Brexit Secretary Dominic Raab said some EU leaders had shown unstatesmanlike behavior in Salzburg.
“We’ve already compromised hugely with the Chequers proposals,” Raab told BBC TV. “What we’re not going to do is be salami sliced throughout this negotiation in a typical style that the EU engages in without movement on the other side.”
For the British media, the message from Salzburg had been clear. “Your Brexit’s broken,” the Daily Mirror newspaper said.
Newspapers led their front pages with a Reuters picture showing May, dressed in a red jacket, standing apparently aloof and alone from a mass of suited male EU leaders.
May faces a fight with angry Conservative lawmakers at her party’s annual conference from Sept. 30.
Many have voiced opposition to her plans, which they said would bind Britain into much EU regulation in return for free trade, and some would prefer a no-deal “hard Brexit” in March, despite warnings that would ravage the British economy.
“Theresa May’s Brexit negotiating strategy has been a disaster,” opposition Labour leader Jeremy Corbyn said. “The Tories have spent more time arguing among themselves than negotiating with the EU.
“The political games from both the EU and our government need to end because no deal is not an option.”
In response to May’s statement, the Confederation of British Industry and other business bodies said they wanted to see constructive dialogue, not rhetoric.
Last week, London Mayor Sadiq Khan added his voice to those including union and business leaders who said there should be a second Brexit referendum. Scotland’s top court ruled on Friday that the European Court of Justice should consider whether Britain could unilaterally change its mind on Brexit.
“The referendum was the largest democratic exercise this country has ever undergone,” said May, who has repeatedly ruled out a second vote following the original 2016 referendum. “To deny its legitimacy or frustrate its result threatens public trust in our democracy.”