Monthly markets round-up: Saudi’s attempt to woo passive funds pays first big dividend

Saudi Arabia’s stock exchange, Tadawul, saw its index rise 6 percent during the month of March as investors anticipated that it would be included onto the secondary FTSE Russell emerging market index.

FTSE Russell confirmed this in an announcement on March 28, which was immediately welcomed by Tadawul’s chief executive, Khalid Al Hussan.

He said the decision “indicates growing investor confidence in the Saudi capital market and recognition that we are among the largest and most liquid emerging markets in the world”.Inclusion onto the index will take place next year in five phases between March and December, and will mean Saudi equities should benefit from an inflow of investment from passive investment funds.

A note published by emerging markets specialist Renaissance Capital estimated that the FTSE Russell index is tracked by about $79 billion of passive funds – the biggest of which is a $68 billion exchange-traded fund managed by asset management firm Vanguard.

If a 2.7 percent weighting in the secondary index is applied to the Saudi market, Renaissance Capital stated that about $2.1 billion in investment would flow from passive funds, plus a further £$23 million from active managers that track passive investments.

Thus far, Saudi Basic Industries (SABIC) and Al Rajhi Bank have been among the main beneficiaries of inflows from investors who were anticipating a positive decision. SABIC gained in value by 11 percent in March, while Al Rajhi gained 3.2 percent.

Shabbir Malik, banking analyst at EFG Hermes said the prospects for Saudi Arabia’s banking sector look good.

“We believe Saudi’s improved economic outlook and rising United States interest rates are positive for the banks,” he told Zawya via email. “Moreover, we see stocks of banks such as Al Rajhi, National Commercial Bank (NCB) and Samba benefiting from flows due to the emerging markets upgrade.”

Vijay Valecha, chief market analyst from Century Financial Brokers, said: “The kingdom of Saudi Arabia is getting bold and ambitious and it is shedding its cautious approach.”

He cited last week’s announcement that the kingdom is planning the world’s biggest solar project – a $200 billion investment alongside Japanese technology investor Softbank – as evidence of this, stating that this “could create lot of industries along the solar value chain”.

He also pointed to the recent corruption crackdown in the kingdom, which raised concerns among potential investors even though the kingdom has said that it has raised about $100 billion from the action it has taken.

“Even though it got a lot of negative press, government has pledged to maintain its business friendly stance,” Valecha said via email. “Also, it plans to increase the number of listed companies from 170 to 250.”

A Reuters poll of 13 leading fund managers conducted at the end of March just before the FTSE’s decision found that 46 percent of the participants expect to raise their Saudi allocations over the next three months and 23 percent expect to reduce them.

That is a positive balance, but significantly less positive than the previous two polls. In the last poll conducted at the end of February, which 69 percent expected to raise allocations to Saudi Arabia and none planned to reduce them.

Yet despite the positivity regarding the kingdom’s prospects, Egypt’s blue-chip index was the top performer among its peers in the Middle East, jumping 12.7 percent in March.

The Egyptian Exchange continues to benefit from a set of reforms in the country. Political stability, an improving macroeconomic outlook and the central bank’s decision to cut interest rates in February – the first time it has done so since letting the currency float freely in 2016 – all reflected positively on the market’s performance, as investor sentiment improved.

Qalaa Holdings has attracted lots of interest from investors in March, gaining 75.5 percent during the month, as investors are awaiting the launch of Egyptian Refining Company (ERC), in which Qalaa is a key shareholder.

“The stock has been rallying in anticipation of the long awaited ERC project coming online later this year. ERC has reportedly cleared its main funding obstacles ahead of its start-up, following the injection of $500m in capital recently,” Ahmed Hazem Maher, analyst at EFG Hermes, explained in an emailed statement.

“The market is expecting ERC to generate considerable cash flows, which would be up-streamed in dividends to Qalaa Holdings in later years. These dividends, once up-streamed, should alleviate Qalaa Holdings’ debt burden,” Maher added.

In the UAE, a continued weakness in real estate markets weighed on Dubai’s index, which ended the month 4.1 percent lower. Neighbouring Abu Dhabi’s index dropped 0.2 percent.

Shares in Emaar Properties and Deyaar Development closed 6 percent and 9.8 percent lower respectively.

According to the Reuters poll, 31 percent expect to raise equity allocations to the United Arab Emirates and 15 percent to reduce them, the first positive balance for the UAE since December.

In Oman, the Muscat Securities Market Index dropped 4.5 percent during the month, and was trading near nine-year lows by mid-March, before recovering some lost ground by the end of the month.

During the month, ratings agency Moody’s Investors Service lowered the long-term issuer and senior unsecured bond ratings of the government of Oman to Baa3 from Baa2, with a negative outlook. Similar actions were taken against eight corporate and seven banks.

In a research note, Muscat-based Ubhar Capital said: “The recent decline in the market can be attributed to multitude of factor(s), including and not limited to: Moody’s rating action on Oman and some of the companies, exit of investment from GCC and international investors towards other markets, companies going ex-dividend and portfolio restructuring of local investors towards GCC.”

Across other GCC markets in March, Qatar’s index dropped 0.9 percent, Kuwait’s index declined by 2 percent and Bahrain’s index dropped 3.7 percent.