Saudi MSCI inclusion to attract $13 bln of passive flows: BofAML

Saudi Arabia’s inclusion process in MSCI Emerging Markets (EM) Index will see more than $13 billion of passive flows coming into the Saudi market in 2019, Bank of America Merrill Lynch (BofAML) noted in its report on Monday.

“Half of this $13 billion was observed on May 28 of this year, with a further $6.5 billion of passive inflows expected into the 30 names that will be included in the index,” Hootan Yazhari, Head of MENA & Frontier Markets Research, BofAML, noted in the report. 

This comes atop the $5.5 billion of passive flows that were attracted in to the market on May 28th, he added.

Saudi Arabia commenced its journey in to index inclusion in June 2018, when MSCI announced Saudi would be included in its MSCI EM index starting in 2019.

BofAML report added that given the size of the Saudi market and its relatively material weight (around 3 percent of the MSCI EM index); the MSCI decided that the inclusion would take place over two tranches. 

The first of these was completed in late May of this year, with Saudi now officially accounting for approximately 1.5 percent of the EM index. The second leg, due in August of this year, will see Saudi's weighting increase a further 1.5 percent to reach 2.9 percent of the EM index, the report maintained. 

This will make Saudi the 9th largest market in the index behind Thailand and Russia, but ahead of Mexico. 

Describing Saudi’s inclusion in FTSE EM index in 2019 via 5 tranches, BofAML report said additional $6 billion of passive money will flow into the Saudi market. 

Approximately 50 percent of FTSE inclusion is now complete, with the next tranche due in September 2019.

BofAML report however maintained that valuations and earnings headwinds are a concern.

“Although active fund managers could potentially contribute significant inflows in to the market, we believe their enthusiasm for the Saudi market will likely be dampened currently,” it noted. 

“Specifically, this is due to a combination of relatively rich valuations, tepid earnings growth (we expect earnings growth of 3 percent in 2019 and 7 percent in 2020) and growing earnings headwinds,” it added.