Tadawul move to reclassify sectors positive, analysts say

The Saudi Stock Exchange’s (Tadawul) reclassification of equity market sectors in line with Global Industry Classification Standard (GICS) is a positive step towards making the bourse more investor-friendly, analysts told Argaam.

“There is no market impact of moving to GICS; however, the move follows a series of changes that Tadawul has been making to make the market more institutional investor-friendly,” said Mohamed Al Hajj, equity strategist at EFG Hermes.

“All index providers and investors are used to GICS for their stock screens, etc. The current classification was not straightforward for certain sectors, and it was hard for investors to break down from Tadawul indices sector performances or sector multiples for valuation comparison reasons,” he added.

The GICS classification will make this clearer, and is a positive move in that regard, Al Hajj said.

Jassim Al-Jubran, analyst at AlJazira Capital, also noted that the move would have no major impact, but was positive in terms of restructuring the market and organizing stocks according to their core business.

The new classification of sectors follows Tadawul’s strategy “to support the development of the Saudi capital market,” aiming to boost transparency and offer more reliable information on sector performance, it said in a statement last week.

The revised structure consists of 20 industry groups, representing the second level of GICS. Business activity and revenue are the two main factors of classification.

The reclassification was expected and “an important step in the right direction for MSCI inclusion,” said Alex Guy, chief executive at Abu Dhabi-based Eshara Capital.

The kingdom is targeting inclusion in the MSCI Emerging Markets’ index by the end of 2018, Mohammed Al-Jadaan, chairman of the Capital Market Authority (CMA) said last September.

In order to qualify for the upgrade, the Saudi government announced a series of reforms targeted for the first half of 2017, just ahead of the review in May. These include the introduction of stock borrowing and lending, short-selling, and moving the settlement cycle to a t+2 basis.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com