The Saudi Arabian market has witnessed successful inclusion in the MSCI Emerging market index with a weightage of 2.83%, Al-Rajhi Capital Research said in its latest report on Saudi Arabian Equities released Monday. A total of 31 companies were included with the second tranche of inclusion ending August, it added. The foreign ownership has increased to 5.38% at the end of August 2019 from 1.78% at the end of June 2018 when the decision to include into EM Index was announced. This equates to an increase of around SR70 billion during the above period. The index rose as expected – to 9,400 levels from around 8,150. The main sellers were GRE (Government/Related Entities), whose ownership has declined to 34.7% at the end of August 2019 from 39.3% in June 2018%. Post the inclusion, SABIC, Al Rajhi Bank and NCB have seen the highest inflows. There was no defined correlation between DTC (days to cover) and price changes as seen in Figure 3. The top performers during the same period were Bupa (+73%), Riyad Bank (+64%) and Bank Al Bilad (+39%). Post the event, we expect gradual correction and the focus would be back on fundamentals. In the week post the first MSCI phase inclusion (end of May), Al-Rajhi said it had seen market inflows of SAR29.5bn and outflows of SR22.1 billion with a net increase resulting in QFI + Swap ownership to 3.2% (6.4% along with strategic shareholders). "We saw a similar episode in the second phase of MSCI inclusion resulting in foreign inflows of SR29.8 billion and outflows of SR23.0 billion in the week ending August 29 reflecting arbitrage trading strategies by active funds. More specifically on the date of the inclusion we saw net inflows of SR5.4 billion based on our calculations." Purely on the basis of multiples, the market is trading higher than previous levels. The report said "we have seen a decline in almost all the peer markets post inclusion." Thus it is likely the same case for Saudi Arabia. For example, Dubai and Abu Dhabi fell by 23% and 14% respectively after the inclusion. "We have segregated the timeline into two phases with the first phase being 1 year before MSCI's decision (to include Saudi in MSCI) and the second being till the end of inclusion (August, in the case of Saudi). We see that for the whole market, the average multiple before inclusion was 16.6x and post inclusion, it reached to 19.9x. When we do the same exercise for the sectors, we see that only healthcare is trading at the same level as before inclusion (Figure 5). We have replicated for the 31 stocks which were included in the MSCI EM Index and shown in Figure 6. Our top picks are in Figure 8. Moreover, Al-Rajhi advised investors to adopt to wait and watch approach in the near term as "we believe the momentum would continue to be negative till around 7500 levels (please see Figure 7 for scenario analysis)." While some investors are of the view that there would be a shift into non-MSCIs from MSCI names, we believe it may not be the case as the multiples are high for the whole market. Hence stock selection than sector allocation would be preferable. Relatively the domestic service oriented sectors are likely to be more attractive than the export or manufacturing oriented sectors at this point in time. In a nutshell, the list of challenges for the market include a) reversal of sentiments post MSCI inclusion b) global trade war concerns keeping oil bulls at bay (currently Brent is trading at 59.25/barrel) c) Fed lowering interest rate d) no respite in petchem product prices e) inclusion of Kuwait or other markets in MSCI EM Index which could lower Saudi weights slightly, meaning QFI outflows where total size of funds remain unchanged. — SG
