NCB Capital: Saudi stocks to account for 2.5% of MSCI EM Index

The Saudi Stock Exchange (Tadawul) is expected to account for 2.48 percent of the MSCI Emerging Markets Index, implying inflows of $40.8 billion from the investors that use this benchmark, NCB Capital (NCBC) said in a recent report.

Active investors would contribute $34.2 billion to these inflows, with the remaining $6.6 billion will come from Exchange Traded Funds (ETFs) investments.

Active investments are expected to enter into the Saudi market once the global equity index compiler MSCI puts Saudi Arabia on its “Watch List”.

ETFs, however, would inject investments upon the Kingdom’s official inclusion in the index.

The brokerage firm added that lack of incentives led the Saudi bourse to trade in a narrow range. However, this performance is about to change amid potential inclusion into global indices, which are widely used by fund managers worldwide to measure performance.

While Tadawul is a potential candidate for MSCI inclusion, more cash flows are expected to be drawn to the market, NCBC added.

Accordingly, there is a strong opportunity to benefit from these cash flows, with a focus on attractive options, as the Saudi market outperforms MSCI EM Index.

Stock markets usually rally ahead of a potential upgrade into key global indices, as active investors inject more cash, which translates into positive performance in those markets.

As for stock performance, NCBC said its forecasts depend on base case scenarios for every company, expected cash flows, stock liquidity, and interim weight of Saudi stocks on the MSCI Index.

A total of 20 firms are expected to be key players on inclusion into MSCI, led by Saudi Basic Industries Corp (SABIC), Saudi Telecom. Co., Al Rajhi Bank and state-owned utility Saudi Electricity Co.

Other players are Almarai; Samba Financial Group; The Saudi British Bank; Banque Saudi Fransi; Yanbu National Petrochemical Co. (Yansab); Riyad Bank; Arab National Bank; Jarir Marketing Co.; Tawuniya; Tasnee; Bupa Arabia; Saudi Industrial Investment Group (SIIG); Advanced Petrochemical Co.; Saudi Airlines Catering Co.; and Al Tayyar Travel Group Holding Co.

Companies with high market capitalization are projected to receive strong cash flows. Meanwhile, firms with lower market capitalization and liquidity are likely to see stronger rallies, the report added.