Tadawul volume set to rise as MSCI to complete upgrade

The Saudi stock market (Tadawul) is likely to witness spike in volumes as global index compiler MSCI will complete Tadawul All Share Index's (TASI) inclusion into the emerging markets (EM) index tomorrow (August 27).

However, the bourse will toe the global markets, reacting to global factors such as re-escalation of US-China trade war fears and oil price volatility, analyst said.

“We expect five percent decline (TASI) over the next six months. Other factors such as oil prices, geopolitical tensions and corporate earnings growth will guide the direction of the market,” Vrajesh Bhandari, senior portfolio manager - asset management, Al Mal Capital, told Argaam.

“Investors would look to offload remaining large-cap positions as there would be no further major flow event,” he added.

Muhammad Faisal Potrik, head of research at Riyad Capital, also believed that the market has already incorporated the final inclusion in the MSCI EM index event.

“Our view is that the market inclusion event is now behind us and the Tadawul will be driven by more fundamental factors now (such as earnings and dividend yields) as well as global market outlook. Given greater foreign ownership, the market is likely to follow the world market direction more than it has in the past.”

In a research note on Sunday, Arqaam Capital said it expects to see circa $6.8 billion of passive inflows into Saudi stock market as part of phase 2 of MSCI EM inclusion.

However, it added that "it appears that the Saudi index trade is mostly over, as we have already recently seen significant selling pressure, and expect to see weakness into the trade this week".

In March, Khalid Al Hussan, chief executive officer, Tadawul, estimated the passive inflows from MSCI at $10 to $11 billion.

Bhandari estimated a total $12 billion to have come in through MSCI trackers.  Though Potrik did not give an estimate, he emphasized that the first tranche MSCI inclusion witnessed active money managers selling to passive money managers.

“Given the recent increase in negotiated deal volumes in the market, it could be that active managers are again accumulating to sell to passive funds in the inclusion,” he noted.

Following the final tranche of MSCI inclusion, Saudi Arabia’s weighting on the MSCI EM index will increase to 2.83 percent from 1.45 percent based on August 27 closing prices.

The Tadawul has extended the closing auction and trade-at-last sessions tomorrow for 20 minutes each.

Write to Parag Deulgaonkar at parag.d@argaamplus.com