Tadawul’s MSCI inclusion could boost TASI above 9,000: Riyad Capital

The Saudi Stock Exchange (Tadawul) could see foreign capital inflows in the range of SAR 75 billion and SAR 100 billion, if index complier MSCI decides to include the bourse in its Emerging Market index, Riyad Capital said in the Global Investment Perspectives report.

The advisory firm also revised upwards its earlier target for Tadawul All Share Index (TASI), noting indicators that point to that possibility that the main index could cross 9,500 points, on the back of a positive MSCI decision.

Riyad Capital, however, added that it would not declare “such an elevated level” as an explicit price target, but sees strong upside potential for TASI in 2018.

The firm said it continues to hold “overweight” position on Saudi equities.

The MSCI decision is expected later this week, and Riyad Capital believes that the FTSE Russell approval in March has increased the probability of a positive decision by MSCI as the inclusion criteria are generally similar.

“In the positive case of a dual index inclusion we can, therefore, expect a foreign capital inflow of about SAR 90-120 billion in the next 12-18 months,” Riyad Capital said.

“This would lift the share of foreign ownership in Tadawul from 4.2 percent by the end of 2017 to about 10 percent to 11 percent,” it added.

Foreign institutional investors have already started to buy into the Saudi market, with an analysis of Q1 2018 trading activity indicating that foreign institutional investors purchased Saudi equities to an amount of SAR 8 billion ($2.1 billion).

This has also pushed the share of foreign institutional investors’ ownership from 0.9 percent at the beginning of the year to 1.5 percent by the end of March, the report said.

“If we consider that this SAR 8 billion constitutes only a fraction of the entire foreign capital of estimated SAR 90-120 billion expected to enter the Saudi stock market, it seems highly likely in our view that there will be a continued positive impact on the market pushing Tadawul distinctly beyond our fundamental target level for 2018,” the report said.

In March, Hans-Peter Huber, chief investment officer at Riyad Capital, told Argaam that the Tadawul All Share Index (TASI) is estimated to touch 8,100-mark, driven by ongoing reforms in the Kingdom, along with FTSE and MSCI updates.

The benchmark index crossed the projected target of 8,100 in April, soon after FTSE gave its approval for Tadawul’s inclusion.

In its recently released report, Riyad Capital took Pakistan as reference case to assess the size of the impact on Saudi market.

Pakistan’s Karachi All-Share Index was included in the MSCI Emerging Market index in June 2017, leading to index experiencing a PE-multiple expansion in the order of 18 percent, the report said.

“If we translate this to the case of Tadawul taking the announcement date of FTSE Russell as the starting point, this would imply a PE-ratio lifted to a level of about 20x,” Riyad Capital said.

“Using our EPS forecast for 2018 a valuation level of 20x would imply TASI ending up above 9,500,” it added.

Meanwhile, in a separate report, Riyad Capital said it expects Saudi economic growth to recover in 2018 by 1.7 percent after a contraction of -0.7 in 2017.

“This rebound is the result of a positive contribution by the oil sector, where the output cut 2017 is fading, and a continued recovery of the non-oil economy fueled by an expansionary budget in 2018,” the firm said in the Saudi Economic Chartbook.

Due to higher-than-expected oil revenues, the budget deficit is expected to shrink below its budgeted target of SAR 195 billion, it added.