Dubai

Structural and economic reforms happening in the Middle East and North Africa (Mena) region, particularly in Saudi Arabia and Egypt, are expected to give a boost to the corporate earnings and equity valuations in the short to medium term, according to recent report from Emirates NBD Asset Management and Jupiter Asset Management.

The recent MSCI upgrade of Saudi Arabia is also expected to bring in additional foreign capital, boosting equity valuations. MSCI recently promoted Saudi Arabia to its emerging market index (in a two-step inclusion process will occur in May and August next year), representing a fillip to the country’s Vision 2030 plans to make its stocks more internationally tradable.

In 2018, anticipation of the now-confirmed MSCI upgrade for Saudi Arabia has driven the Tadawul All Shares Index (Tasi) up 15 per cent year to date, in stark contrast to the MSCI EM Index itself, which is down 2 per cent for the year. At a weighting of approximately 2.6 per cent and with 32 securities selected, the importance of the upgrade is likely to serve as a catalyst for the Saudi capital market.

“With a raft of socioeconomic changes taking place in Saudi Arabia — from women driving to the opening of the first cinemas — we are seeing huge opportunity for EM investors in 2018-19. While the country has been able to plug forex leakage with issuance of US dollar-denominated debt, a great deal more can be achieved through its stock market, especially after inclusion on the FTSE Russell and MSCI EM indices,” said Salman Bajwa, Senior Executive Officer at Emirates NBD Asset Management.

Asset managers said Saudi market has been delivering strong returns last year, even amid political and economic uncertainties. “The Tadawul All Share Index is up by double digits year-to-date, and our own Saudi Arabia Equity Fund has exceeded 18 per cent returns, as investors have become increasingly bullish on the Kingdom,” said Bajwa.

According to estimates by Emirates NBD Asset management, even ahead of the MSCI upgrade, smart fund managers from the US, UK and Asia have already dipped into the Saudi market, with foreign inflows surpassing $3 billion by May 2018, which is equivalent to all inflows to the UAE and Qatar for the whole of 2014, when they were upgraded.

Analysts said the ongoing structural reforms and fiscal reforms will contain capital outflows from the country. “While the Improving oil prices, structural and economic reforms will restrict capital outflows from the country, the MSCI inclusion is expected to bring in about $50 billion capital into Saudi Arabia,” said Richard Lee, Senior Porfolio Manager, Emirates NBD Asset Management.

Global asset managers and analysts expect MSCI upgrade and potential Aramco IPO could open floodgates of foreign investment into Saudi equities.

“Given that an estimated $1.6-1.8 trillion of assets under management track the MSCI EM index and with MSCI giving Saudi Arabia a 2.6 per cent weighting in its EM index, we view that this could translate into foreign inflows in the stock market of between $42 to 47 billion (5.6 per cent to 6.3 per cent of GDP) by next year,” said Ehsan Khoman, Head of Research and Strategist for MENA at MUFG.

The Kingdom received total capital inflows of only $25 billion in 2017. Following the announcement, MSCI stated that the Aramco IPO can push Saudi’s weight to 4.4 per cent from 2.6 per cent, effectively leading to $70-79 billion (9.4 per cent to 10.6 per cent of GDP) of foreign inflows into the Kingdom.

Despite the bullishness around the MSCI upgrade and a slew of reforms the Kingdom is undertaking, analysts have cautioned that investors should be diligent in their stock picking strategies.

“A number of sectors in Saudi Arabia may seem attractive at first glance, but investors should be selective and avoid blindly following indices. Additionally, economic reforms such as the introduction of VAT and the removal of fuel subsidies may initially inhibit growth. However, top sector targets including health care, consumer and insurance are set to benefit from both structural reforms and the Kingdom’s initial EM index weightings,” said Ross Teverson, Head of Strategy — Emerging Markets at Jupiter Asset Management.