The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
Bloomberg
Bank and insurance shares jumped in Saudi Arabia hours before the country learns whether it may begin the formal process to become classified as an emerging market by MSCI Inc., a development that might boost its stock market for months.
The banking sector of the Tadawul All Share index leaped 4 percent and closed at the highest level this year. MSCI, a global index provider, will announce on Tuesday afternoon New York time whether it will include Saudi Arabia in its emerging market watch list, which allows for its possible addition to the category in 2018.
That approval would increase demand for Saudi shares as fund managers who passively track MSCI benchmarks would have to buy or increase their holdings of newly included stocks.
While benchmark Tadawul index underperformed average return for developing economies in 2017, strategists have said the reclassification is possible and would be positive for the country’s equities, given the kingdom has carried out changes to attract foreign investors as the government diversifies the economy away from oil.
“Local Saudi Arabian investors are not pricing†an addition to the watch list, according to EFG-Hermes strategists Mohamad Al Hajj and Simon Kitchen. “MSCI’s announcement could force these investors to re-engage, taking Tadawul towards the high end of its trading range of 16 times its one-year forward price-to-earnings†ratio.
An inclusion could lead to improved valuations, liquidity and foreign inflows to the country’s market, according to strategists at brokerage Arqaam Capital. Equity investors can expect returns of about 20 percent in each of the years leading up to the upgrade and including in the year of the event, according to EFG-Hermes’s research of other countries that gained emerging-market status. Then they can expect a decline of 12 percent in the following 12 months.
Lenders including Banque Saudi Fransi, The Saudi British Bank, Bank AlBilad and Arab National Bank each rose at least 4.4 percent on Monday.
All 12 members of the Tadawul Banks Index gained in the session.
Shares in banks that have been able to keep funding costs at low levels without sacrificing deposit growth are seen as increasing from an eventual inclusion, provided valuations are attractive.