Arabia’s inclusion in emerging market stock benchmarks highlights the
role of largely opaque players in the kingdom’s market: government funds
that could be ready to push the sell button.
FTSE Russell will start adding Saudi equities to its developing-nation gauges today, with peer MSCI Inc following suit later. Inclusion is eventually expected to trigger inflows from so-called passive buyers, whose assets track benchmarks and must align with the gauges.
Other investors may hold off because they see funds with links to the government, whose holdings may have buoyed stocks during recent political turmoil, as primed to offload stakes as newcomers enter.
International institutional investors have suggested in meetings “that they are likely to take an underweight position in the market, mainly on valuation grounds and potential concerns about government-related entities selling into the event,” Arqaam Capital analysts Jaap Meijer, Michael Malkoun and Nadine Mdeihli wrote in a report on March 4.
The kingdom’s Public Investment Fund is the biggest investor in Saudi Arabia’s $530bn stock market, it has confirmed to Bloomberg, giving credence to speculation from analysts, traders and investors who frequently said that funds tied to the government support prices during times of high volatility.
Any declines on the Saudi market’s benchmark index present “buying opportunities which would be acted upon by some of the funds,” a PIF spokesman said in an e-mailed response to questions.
Market participants suspect that government-related funds swooped in to support the market after the imprisonment of local billionaires at the Ritz-Carlton Hotel in Riyadh in late 2017 and the international crisis following columnist Jamal Khashoggi’s murder at the Saudi consulate in Istanbul last year.
Some may see that as a convenient backstop to selloffs, making up for the political risks that have unnerved investors over the past few years. Not Mark Mobius.
“Many people are concerned about the political environment,” Mobius, a veteran investor in developing nations who set up Mobius Capital Partners LLP in 2018 after three decades at Franklin Templeton Investments, told journalists in Dubai last week. “It’s going to take a year or two before people really begin to say that Saudi Arabia is the place we want to be.”
Passive inflows could reach about $20bn once FTSE and MSCI complete their inclusions, according to the Arqaam Capital analysts. Active managers could bring in another $40bn. At the same time, as much as $21.8bn of government-related funds is earmarked for sale throughout the index inclusion process, said Meijer.
Those funds and early buyers positioning themselves to sell will generate so much liquidity that “the marginal investor will see little, if any, material benefit from passive buying,” said Adam Choppin, an investment officer at FIS Group in Philadelphia. “The absolute direction is harder to peg, but as a relative trade, I expect Saudi to strongly underperform most emerging markets” following recognition by index compilers, he said.
The Saudi stock exchange and the local regulator have worked since 2015 to earn the upgrades, allowing investors from abroad to trade directly, introducing new corporate-governance rules and adopting global accounting standards.
But ultimately, there’s little visibility on what PIF-related funds own, according to FIS Group’s Choppin. So while he thinks they’ll be net sellers, there’s no telling the “scale of their selling.”
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