Surge in inflows and liquidity reminiscent of UAE's experience in 2013
History suggests Saudi's MSCI upgrade will attract long-term uptick in foreign investment
In January, planet Earth witnessed the “supermoon”, an astronomical effect of seeing a “brighter” full moon from earth as it aligns directly with the sun.
While a supermoon brightens up the night sky, its effect on earth’s inhabitants and by extension their financial markets is a somewhat less exact science.
But if the record inflows we saw into Mena equities in January are anything to go by, one might argue that the supermoon’s existential powers were in full effect.
While one month does not make a trend, we believe the massive equity inflows in January on a relative basis are reminiscent (at least anecdotally) of the big pick-up in inflows we saw in the UAE in early 2013, the year the local market was included in MSCI’s widely-tracked Emerging Markets index. As Saudi Arabia gears up for potential EM inclusion, with a decision to be announced in June, it might be useful to look back at the flows, liquidity and market performance of UAE equities when it went through the same consultative process ahead of its own inclusion.
January 2013 saw a notable pickup in incoming money, specifically $183 million in UAE foreign inflows compared to $272m in the entire preceding year. In Saudi Arabia’s example, we saw $619m inflows in January 2018.
These flows were no less than 3.3 times greater than those seen in the preceding year alone.
In the first six months of 2013, the UAE attracted $450m, twice the inflows seen in the preceding six months. The Saudi bourse (Tadawul) witnessed outflows (prior to January 2018) of $294m.
Looking deeper into liquidity, we note a substantial improvement in this same period in the UAE, where liquidity levels increased around 3.5 times to $202m on a monthly basis. Following MSCI EM index inclusion in June 2013, liquidity jumped to $334m, around 5.5 times that seen at prior levels.
Tadawul is already the most liquid market in the region at $950m in January, with the caveat that liquidity is less than half of what it averaged during the years 2011 to 2015.
Finally, in addition to strong inflows and improved liquidity, UAE stocks rose 67 per cent that January, a 55 per cent outperformance compared with MSCI EM.
In 2017, Saudi equities were flat compared with MSCI EM, which rose 34 per cent. For the year-to-date however, we are seeing Saudi equities at levels slightly above MSCI EM prices, the Tadawul is up about 4.7 per cent, with MSCI EM up 4.1 per cent.
There are some in the market who believe that January’s record equity inflows mark the beginning of a longer-term upswing in foreign institutional money interest in Saudi Arabia. Consequently, we could see interest in the entire region increase, with further inflows expected as we approach MSCI’s decision in June.
More sceptical market commentators could point out that this is a story we have seen before, specifically where Mena equities have seen a spike in foreign inflows in anticipation of a positive market catalyst being announced, only to see a reversal in these flows upon the realisation that this catalyst may not happen.
We in Deutsche Bank are in the first camp, and continue to believe in the Saudi MSCI inclusion story. We see a strong possibility of the Tadawul’s inclusion into the MSCI index in 2019. We also have firsthand experience of a good deal of international institutional and real-money interest in the Saudi equity story; our recent client meetings with Saudi Arabia’s Capital Market Authority and Tadawul in London in late 2017, followed by meetings with the Saudi Arabian General Investment Authority in Davos in January, saw packed rooms of international investors keen to hear more about Saudi Arabia.
As the kingdom’s authorities continue their focus on the broad set of economic and social reforms via the National Transformation Programme, this only makes us more positive in our outlook for the future of the Saudi stock exchange.
History is not always necessarily a fair guide when predicting stock market flow. But given the similarities – both geographically and economically – between regional markets, we’ve argued before that market participants would be advised to at least consider the implications of the Tadawul’s ascension to the MSCI EM Index.
Who knows, by the time the next supermoon comes around we might just see another market jolt that’s “out of this world”.
Aleksandar Stojanovski is an equity research analyst with Deutsche Bank