Strategy Note /
Saudi Arabia

Saudi FTSE EM inclusion: SAR5.6bn inflow expected in 3rd tranche

    SNB Capital
    19 June 2019
    Published bySNB Capital

    The implementation date for the third tranche of the inclusion of the Saudi market into the FTSE index series is 24 June 2019, (with a closing price date of 20 June 2019). To recap, the Saudi market is projected to have a weight of 3.0% in the FTSE Emerging All Cap index and 0.30% in the FTSE Global Equity index. Saudi’s addition to the FTSE Emerging All Cap index is expected to result in total inflows of cSAR22.2bn (cUS$5.9bn) mainly from passive funds. The third tranche represents 25% (i.e. SAR5.6bn) of total inflows. The first and second tranches (25% of total inflows) were completed successfully by 1 May 2019 with positive feedback from investors regarding the implementation process.

    • Saudi’s weight in the FTSE Emerging Markets index is estimated at c3.0%. The upgrade of the Saudi market to emerging market status by FTSE commenced in March 2019 and is expected to be completed by March 2020. The initial 50% has been split over March (10%), April (15%) and June (25%) to ensure a smooth phasing in of the Saudi market. The remaining 50% will be implemented over 2 tranches, in conjunction with FTSE quarterly reviews in September 2019 and March 2020 (see Exhibit 1). 
    • We expect the inclusion of the market in FTSE EM to result in passive inflows, at current prices, of up to cSAR22.2bn (or US$5.9bn) over time. We believe cSAR5.6bn (or US$1.48bn) of flows came in the first and second tranches, while we expect cSAR5.6bn (or US$1.48bn) of flows in the third tranche.
    • Similar to the first and second tranches, we expect the majority of the trades to be executed on the closing price of 20 June 2019 (during the auction period) and the implementation date, (also during the closing auction time). This is due to passive funds desire to minimise tracking errors.
    • Tadawul has gained 15% this year and is currently trading at a PE of 20.4x (12-month trailing), higher than the last 10 years average of 17.1x. Nonetheless, we expect the market to remain well supported due to the remaining inflows from passive investors benchmarked to both FTSE and MSCI indices.