Saudi stock market surges before MSCI decision

Top-performing shares are those likely to be part of the upgrade

DUBAI: Saudi Arabia’s stock market surged on Monday after a regulatory official was quoted as predicting the bourse would enter MSCI’s emerging market index sooner than most investors had expected, while the rest of the region was subdued.

Mohammed El-Kuwaiz, Vice Chairman of the Capital Market Authority, was quoted as saying by the Asharq al-Awsat newspaper that he expected the Saudi market to be included in the index by the end of 2018.

MSCI will announce late on Tuesday whether it is putting Saudi Arabia on a list for possible index inclusion. Most funds think Riyadh has done enough to be included, but if MSCI follows its usual timetable, the actual entry would occur in mid-2019. However, MSCI has the flexibility to move faster if it wishes.

The Saudi stock index rose 2.4%, its largest single-day gain since November, although trading volume was only moderate.

“Local funds, which have been somewhat sceptical of MSCI putting Riyadh on review, reacted to the comments made by the vice chairman,” said Mohamad al-Hajj, macroeconomic strategist at EFG Hermes.

Some of the top-performing shares were those, which may eventually be added to MSCI’s standard emerging market index, including Banque Saudi Fransi, which jumped 7.5% and medical insurer BUPA Arabia, up 6%.

Although progress towards inclusion would be a net positive for the Saudi stock market, some analysts are cautious about speculative fever trumping fundamentals, which are not particularly supportive.

Saudi Arabia’s 12-month forward price-earnings ratio is 13.9 while the MSCI Emerging Market Index is at 12.

“While we believe that inclusion in watch list for Saudi Arabia will lead to enhanced market liquidity and generate more interest in the Saudi market, we caution investors to be wary of irrational exuberance as inclusion is unlikely to change market fundamentals, which currently remain tepid,” said a note by Alrajhi Capital.

The government’s petrodollar revenues remain under pressure and reforms planned for the next 12 months include another round of fuel and electricity price hikes and introduction of a value-added tax, which will raise costs for the private sector.

Published in The Express Tribune, June 20^th, 2017.

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