12/06/2017 02:18 AST
Saudi Arabia's financial sector is hoping for tens of billions of dollars of foreign portfolio funds to start flowing into the country this month, but the money may do little to boost a stock market depressed by low oil prices and rising taxes.
On June 20, global equity index compiler MSCI will announce whether it is putting Saudi Arabia on a list for possible upgrade to emerging market status. Index firm FTSE will decide in September whether to make Riyadh a secondary emerging market.
Then in late 2018, authorities aim to list national oil giant Saudi Aramco in Riyadh, selling about 5 per cent in what is likely to be the world's biggest initial public offer of shares.
All three events promise to draw large flows of passive funds - money that benchmarks itself against international indexes - to Saudi Arabia, and by raising the kingdom's profile among global investors, attract a volume of active funds that could be even larger over the next couple of years.
"Saudi Arabia will become tied to significant global capital flows. The market could be larger than Turkey, larger than Thailand, possibly larger than Mexico," said Asha Mehta, portfolio manager at US based-Acadian Asset Management, which manages over $77 billion (Dh282.5 billion) of assets globally.
Market capitalisation
Only about 60 institutions have become Qualified Foreign Investors in the Saudi bourse since it opened to direct foreign investment in mid 2015; the index changes and Aramco's listing could increase that number.
"The process is gradual, but the boost to liquidity and market capitalisation in Saudi will make some institutions which have been hesitating decide to enter," said Sandeep Srinivas, senior analyst at FIM Partners in Dubai.
But there are signs the inflow of foreign money into Saudi Arabia may be slower than some investors are hoping, and that it may not trigger a strong rise in the Saudi market.
Low oil prices are keeping buyers wary, while austerity steps planned by the government, as it confronts a huge budget deficit, will dampen corporate profits. Local regulations mean there may be little room left for foreigners to raise their stakes in some firms.
"There are a wide range of factors that will dictate the market's direction over the next couple of years, not all of them necessarily positive," said Simon Kitchen, head of macro strategy at regional investment bank EFG Hermes.
Reflecting this, the Saudi stock index has dropped in the run-up to this month's MSCI decision; it is down 5 per cent since the start of 2017.
Flows
After the exchange began in April to settle trades within two days of execution - the key remaining reform demanded by MSCI - most fund managers think the index compiler is likely to put Riyadh on its review list on June 20.
The actual decision on whether to include Saudi Arabia in MSCI's emerging market index would then occur in mid 2018, and if MSCI follows past procedures, inclusion would occur in mid 2019.
Kitchen estimated MSCI inclusion, not taking into account Aramco's listing, would bring $7.1 billion of passive inflows into Saudi stocks in mid 2019. So some analysts think a positive announcement by MSCI on June 20 will trigger an immediate inflow of active foreign funds.
"We expect foreign funds to enter the Saudi market as soon as MSCI announces the watch list inclusion, and to gradually increase as we get closer to a potential implementation date," said analysts at regional firm Arqaam Capital.
If FTSE decides in September to upgrade Riyadh, changes in its indexes would probably occur in September 2018; this could bring $3.5 billion of passive funds.
Aramco's listing would magnify MSCI- and FTSE-related passive inflows. Kitchen estimated the extra money at $4.8-9.6 billion, depending on whether Aramco achieved a valuation of $2 trillion as the government hopes, or about half that as some analysts bel
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