Saudi stock exchange cheers MSCI emerging markets upgrade

Khalid Al-Hussan, Chief Executive Officer of the Saudi Stock Exchange (Tadawul), speaks during a news conference after the inclusion of MSCI EM to the Saudi Stock Market in Riyadh, Saudi Arabia June 21, 2018. (Reuters)
Updated 21 June 2018
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Saudi stock exchange cheers MSCI emerging markets upgrade

  • Saudi Arabia’s Minister of Finance Mohammed Al-Jadaan: This is a significant milestone for the Saudi capital market
  • Chief executive officer of Tadawul Khalid Al-Hussan: We more excited by what’s about to come as we continue to enhance the market’s future.

RIYADH: The Saudi stock exchange celebrated an “historic milestone” with inclusion into MSCI’s Emerging Market index, as it pledged to make further improvements to become the “leading” market in the Middle East.
The move, announced early Thursday morning Riyadh time, is forecast to attract as much as $40 billion in foreign investment into Saudi stocks, following a series of reforms passed by authorities to bring the Kingdom’s capital markets more in line with international standards.
“This is a significant milestone for the Saudi capital market,” said Saudi Arabia’s Minister of Finance Mohammed Al-Jadaan.
“The reforms of the Saudi capital market, guided by Vision 2030, and the government’s strong commitment to modernize the Saudi economy through comprehensive reforms, have aligned the market with international best standards making it more attractive to both domestic and foreign investors. We will continue to build a law-based capital market to further strengthen investor confidence and steadily enhance market functions to serve the Saudi economy while stimulating savings, financing and investments.”
Khalid Al-Hussan, chief executive officer of Tadawul, told a press conference in Riyadh that he was “more excited by what’s about to come as we continue to enhance the market’s future.” Plans are under way to introduce clearing systems in preparation for equity derivatives trading.
Mohamed El-Kuwaiz, Chairman of the kingdom’s Capital Markets Authority, said that the event was the culmination of a three year process to get the Saudi market into the global emerging market index. “It is a nationally great achievement, and a historic milestone on the journey of Saudi capital markets,” he added.
He added that the move would pave the way for initial public offerings (IPO) on the Saudi exchange, including the historic listing of Saudi Aramco, slated for next year, and other privatizations. “This is not the end of the journey,” he said.
The meeting coincided with the opening of the Saudi market in Riyadh. Saudi shares rose by nearly 1 percent in early trading, before shedding gains to trade slightly higher in the afternoon.
“Saudi Arabia’s market performance over the next few sessions is of little relevance in our view. Some selling of the fact [of inclison] is expected,” Mohamad Al Hajj, an equities strategist at the research arm of EFG-Hermes in Dubai, told Bloomberg.
The index compiler MSCI decided to give Saudi a weighting of 2.6 percent of the EM index, higher than the 2.3 percent it had previously indicated, meaning that more International funds could flow into Saudi Arabia.
At that level, some 150 billion riyals ($40 billion) worth of foreign investment could end up on Tadawul, via a mix of passive and active fund managers. Tadawul officials estimated passive funds — which track the index — account for 25 percent of that.
Sarah Al-Suhaimi, chairman of Tadawul, said that inclusion in the index was a “very important step for Tadawul and for the Kingdom.” She was proud that MSCI had upgraded Saudi Arabia after only one year on its watchlist, which she said was the shortest period on record.
Full official inclusion into the index will take place in two stages over the next 12 months. El-Kuweiz said that the timing of the Aramco IPO was still being finalized and was not dependent on final inclusion on MSCI.
“The IPO and the condition of the market are related, but not directly linked. Obviously the weight of the market will increase when Aramco is included, but that timing will depend on multiple factors, like the market context, the valuation the company puts on itself, and the preparedness of the company,” he said.
“It is our job to ensure the market is ready for such events, and this is what we have done,” he added.
Some analysts argue that the health of the Saudi market depends more on the oil price, domestic economics and regional geopolitics than inclusion in MSCI.
Jason Tuvey, Middle East economist with London based consultancy Capital Economics, said: “We still expect oil prices will drop back over the next couple of years. That is likely to put fiscal austerity back on to the agenda, and we expect that growth in the non-oil sector will slow again in 2019. Meanwhile, geopolitical tensions will linger. And we expect that global appetite for risky assets will deteriorate over the next couple of years.”
He forecast the Tadawul index would fall around 6 percent this year, after a sharp rise in the first half.
Al-Hussan said the MSCI inclusion was a very significant factor for Tadawul. “I disagree that MSCI inclusion is less important than these other factors. It is a sign of the confidence of International investors in the Saudi market, and a reflection of how confident they feel here.”
Saudi Arabia is already the biggest stock market in the Arabian Gulf, with a market capitalization of $520 billion, but policymakers have said they want to make it the “dominant” one too, possibly by encouraging cross-listings of other GCC companies in Riyadh and by co-ordinating regulatory regimes across the region.
Ziyad Al-Ashaikh, Deutsche Bank’s chief country officer for Saudi Arabia, said: “This represents a major milestone. Not just for the kingdom, but for the entire Middle East and one that demands a great deal of attention from institutional investors globally.”


Asian firms shuffle production around the region as US-China tariffs war rages

Updated 23 September 2018
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Asian firms shuffle production around the region as US-China tariffs war rages

  • Some governments, notably in Taiwan and Thailand, are actively encouraging companies to move work from China
  • Some Asian governments hope for an economic and strategic boost from the US-China conflict

SEOUL/TOKYO: A growing number of Asian manufacturers of products ranging from memory chips to machines tools are moving to shift production from China to other factories in the region in the wake of US President Donald Trump’s tariffs on Chinese imports.
Companies including SK Hynix of South Korea and Mitsubishi Electric, Toshiba Machine Co. and Komatsu of Japan began plotting production moves since July, when the first tariffs hit, and the shifts are now under way, company representatives and others with knowledge of the plans told Reuters. Others, such as Taiwanese computer-maker Compal Electronics and South Korea’s LG Electronics, are making contingency plans in case the trade war continues or deepens.
The company representatives and other sources spoke on condition of anonymity because of the sensitivity of the issue.
The quick reactions to the US tariffs are possible because many large manufacturers have facilities in multiple countries and can move at least small amounts of production without building new factories. Some governments, notably in Taiwan and Thailand, are actively encouraging companies to move work from China.
The US imposed 25 percent duties covering $50 billion of Chinese-made goods in July, and a second round of 10 percent tariffs covering another $200 billion of Chinese exports will come into effect next week. The latter rate will jump to 25 percent at the end of the year, and Trump has threatened a third round of tariffs on $267 billion of goods, which would bring all of China’s exports to the US into the tariff regime.
The tariffs threaten China’s status as a low-cost production base that, along with the appeal of the fast-growing China market, drew many companies to build factories and supply chains in the country over the past several decades.
At SK Hynix, which makes computer memory chips, work is under way to move production of certain chip modules back to South Korea from China. Like its US rival Micron Technology, which is also moving some memory-chip work from China to other Asian locations, SK Hynix does some of its packaging and testing of chips in China, with the chips themselves mostly made elsewhere.
“There are a few DRAM module products made in China that are exported to the US,” said a source with direct knowledge of the situation, referring to widely used dynamic random-access memory chips. “SK Hynix is planning on bringing those DRAM module products to South Korea to avoid the tariff hit.”
Most of SK Hynix’s production won’t be affected, the source added, since China’s dominance in computer and smartphone manufacturing makes it by far the largest market for DRAM chips.
Toshiba Machine Co. says it plans to shift production of US-bound plastic molding machines from China to Japan or Thailand in October.
The machines are used for making plastic components such as automotive bumpers. “We’ve decided to shift part of our production from China because the impact of the tariffs is significant,” a spokesman said.
Mitsubishi Electric, meanwhile, says it is in the process of shifting production of US-bound machine tools used for metal processing from its manufacturing base in Dalian, in northeastern China, to a Japanese plant in Nagoya.
In Taiwan, an executive at notebook PC maker Compal, who declined to be named, said the trade war’s impact had been limited so far, but the company was studying its options.
“We can also use facilities in Vietnam, Mexico and Brazil as alternatives,” the person said. “It won’t be easy because our majority production is in China; no other country can replace that at this moment.”
Smaller companies are exploring their options too. South Korean medical equipment manufacturer IM Healthcare, which makes products including air purifiers, is studying a move to Vietnam or South Korea if the trade conflict intensifies, a source with direct knowledge of the matter said.
Some Asian governments hope for an economic and strategic boost from the US-China conflict. In Taiwan, the government is actively encouraging companies to move production out of China, pledging last month to speed up its existing “Southbound Policy” to reduce economic reliance on China by encouraging companies to move supply chains to Southeast Asia.
Taiwan economics ministry official William Liu told Reuters that the trade war was “a challenge and an opportunity” for the self-ruled island. Taiwan depends on China as an export market, he noted, but at the same time could see a boost in jobs from companies moving operations back home.
Thailand also hopes to benefit from the “flow of technology and investment leaving China during the trade war,” said Kanit Sangsubhan, Secretary-General of the Eastern Economic Corridor (EEC) Office of Thailand, which is coordinating a $45 billion project to attract investment into the country. The EEC last month took some 800 representatives of Chinese companies on a tour around the eastern industrial heartland, and the country’s Board of Investment has done seven roadshows in China this year to woo investors.