Saudi blue chips to gain as FTSE tranche 2 inclusion nears

Saudi blue chip stocks are set to gain further following Tadawul’s second tranche inclusion in FTSE Russell Emerging Market index, analysts told Argaam.

The inclusion of second phase (15 percent) will take place on May 1 using official closing prices as of April 30, 2019, according to the FTSE. The first tranche (10 percent) inclusion took place in March, while the remaining three tranches will take place in June and September 2019, and March 2020.

“As was the case with the first tranche, majority of the passive flows are likely to happen in the auction period. Thus, we can expect to see significantly higher trading volumes in the auction on April 30th and possibly a few subsequent sessions as well,” Muhammad Faisal Potrik, head of research at Riyad Capital, told Argaam.

“The market has generally reacted positively to the start of the index inclusion process. The TASI is up 15.5 percent year to date and is likely to continue its bull run in the short term,” he said, adding, “blue chips will be the primary beneficiaries of foreign investor’s interest.”

Sanat Sachar, portfolio manager, Al Mal Capital, expects around $1 billion in inflows to the market during the second tranche.

“We didn’t see much reaction in the market during the phase 1 inclusion as this is quite small in scale in comparison to MSCI inclusion but we believe the market will continue to go up till the final tranche of MSCI inclusion in August,” he said.

While blue chips such as Saudi Basic Industries Corp (SABIC), National Commercial Bank (NCB) and Samba will benefit from the inclusion, Sachar said there will not be any significant share price reaction as the passive money could easily be absorbed in the market.

Nishit Lakhotia, head of research, SICO also expected close to $1 billion in passive inflows, as he ruled out a major spike on the date of inclusion as the bulk of the transactions are likely be pre-negotiated deals.

He believed that overall market sentiment remains positive as foreigners, especially qualified foreign investors (QFIs) continue to build up position in Tadawul since the bulk of the inclusion (MSCI) will take place after April.

Blue chip banks such as Al Rajhi, NCB, Samba, Banque Saudi Fransi have been key outperformers while petrochemical companies have been underperformers, the SICO analyst said.

In a recent report, Asad Khan, head of research, Jadwa Investment, said that around SAR 2.2 billion ($600 million) inflows were seen in March, in relation to the FTSE EM index inclusion.

“The combination of both FTSE EM and MSCI EM inclusion is therefore expected to bring in around SAR 64 billion in passive inflows in the year to March 2020,” he added.

Index provider FTSE Russell said earlier that a total of SAR 23-26 billion in passive inflows are expected over the course of Saudi stock exchange’s transition into emerging market (EM) status. Further, FTSE EM tranches include SAR 3.3 billion in April, and further three tranches in June, September and March 2020, all around SAR 5.6 billion each. 

Write to Parag Deulgaonkar at parag.d@argaamplus.com