FTSE AND S&P UPGRADES BUOY CONFIDENCE IN TADAWUL

Saudi Arabia’s much-anticipated inclusion into the FTSE Russell and S&P Dow Jones Indices finally happened in March, marking a new chapter in the growth of the region’s largest stock index by market cap.

The Tadawul’s inclusion into the FTSE Russell Emerging Markets index is expected to occur in five tranches over the next year, with the first completed on 18 March. The initial tranche of 25% was split over March and April 2019 (10% and 15%, respectively) to ensure a smooth transition.

The Capital Markets Authority (CMA) expects the remaining 75% will be rolled out quarterly in June 2019, September 2019 and March 2020.

“Saudi Arabia’s promotion to Emerging Market status within FTSE Russell’s global equity benchmarks is a significant achievement,” said Waqas Samad, CEO of FTSE Russell.

“The CMA and Tadawul have long been committed to improving Saudi Arabia’s capital markets infrastructure and marks a culmination of their efforts to meet the rigorous requirements for inclusion.”

Similarly, S&P Dow Jones Indices’ Global Benchmark Indices also included Tadawul, with the first phase in March and the second set for September. Saudi Arabia is eligible for inclusion at 50% of float-adjusted market capitalisation in the first phase and at 100% of FMC by September.

“Saudi Arabia’s recent move in our country classification to emerging market from stand-alone is a result of an ongoing consultation with market participants,” said Alex Matturri, CEO at S&P Dow Jones Indices. “It reflects the strong consensus among members of the global investment community and recent positive market structure reforms that support foreign investment in the country.”

Indeed, the Saudi CMA has been on a strong reform drive that has boosted investor confidence and elevated the kingdom’s regulations in line with international standards in the space of two years.

The CMA believes that opening up the market will yield greater investor flows and enhance market liquidity. The reforms are part of the Financial Sector Development Program and Vision 2030 agenda to develop a global financial centre and play a key role as a source of capital. This will then diversify opportunities for issuers and investors alike.

The Tadawul is not done yet. In April, CMA, Tadawul and the kingdom’s Debt Management Office (DMO) rolled out reduced fees and commissions’ structure of the sukuk and bonds market.

Securities Depository Center Company, or Edaa, will reduce initial public offering upload fees and annual registry fees for debt issuers, while Tadawul will also lower its annual listing fees for first and subsequent sukuk and bond issuances, along with caps for Tadawul’s annual listing fees for first and subsequent issuances.

The DMO also announced reducing the par values of governmental issued sukuk from SAR 1 million to SAR 1,000.

Other changes include deregulation of brokerage commissions and elimination of minimum commission cap required. In addition, Tadawul and CMA reduced their trading commissions, while CMA will waive trading commission for most investors.

Meanwhile, Edaa said it will introduce annual safekeeping fees for listed sukuk and bonds holdings.

“These changes represent an important step in further enhancing the kingdom’s capital market by encouraging issuers to list more Saudi currency sukuk and bonds in the public debt market and facilitating increased trading by investors, which will result in greater market liquidity,” said Khalid Al Hussan, CEO of Tadawul.

The three institutions believe that increased liquidity of the debt market will, in turn, contribute to the issuance of more diversified debt instruments and the introduction of new asset classes for investors.

The changes come at a time of new investments pouring into the kingdom’s market. The Tadawul surged 9.4% in January, 3.8% in March and 5.5% in April, with only February registering a small 0.8% decline. Tadawul has jumped nearly 19% in the first four months of the year to become the best performing market in the Arab world.

Trading volumes and value of shares traded have both risen in the past few months as institutional investors position themselves in the market.

There is potential for more activity in the near future. Saudi Arabian stocks will be included in the MSCI Emerging Markets Index and the MSCI ACWI Index in a two-step process starting in June this year.

“The MSCI Saudi Arabia IMI will represent approximately 2.6% of the MSCI Emerging Markets IMI (which includes small-cap stocks) and will add 69 securities to the latter index,” according to MSCI.

The MSCI notes that the inclusion of Saudi Arabia would be beneficial for MSCI Emerging Market Investors as Saudi equities have offered above-average dividend yields for the available history since September 2014. Over the last four years, Saudi Arabia’s yield has, on average, exceeded the emerging markets’ yield by 140 basis points.

In addition, financials and materials comprise more than 75% of Saudi market cap, which provides diversification opportunities for emerging market investors, as the sector’s weighting is distinct from the sector composition of the MSCI Emerging Markets.