June 21, 2018 / 7:22 AM / a month ago

UPDATE 1-Saudi bourse will be ready for inflows after MSCI EM inclusion, stocks rally

(Adds stock market reaction, quote from Saudi finmin, funds)

By David French and Marwa Rashad

NEW YORK/RIYADH, June 21 (Reuters) - Saudi Arabia's stock exchange will work with stakeholders to ensure the substantial inflows of capital it is expecting in the coming months will not adversely affect the market, the bourse's chief executive said on Wednesday.

Khalid al-Hussan was speaking to Reuters after MSCI said it would include the Tadawul, as the exchange is known, in its emerging markets benchmark, a move that could draw as much as $45 billion of new capital into the kingdom.

MSCI's decision comes three months after another index provider, FTSE Russell, also gave Saudi Arabia emerging market status, a decision it is estimated will yield a further $30 billion of investor capital.

Saudi Finance Minister Mohammed al-Jadaan said in a statement that Saudi authorities will continue to work with all relevant stakeholders to further improve applicable rules and regulations to facilitate foreign investments.

For the Gulf's largest bourse, potential combined inflows into a market with a capitalization of 1.95 trillion riyals ($519.9 billion) will need to be carefully managed.

"We will start immediately to address all the activity -- we will be ready," Hussan said in a phone interview.

"We will work with MSCI and FTSE to take all necessary steps to launch these implementations."

The Saudi index was up 0.5 percent in early morning trade, outperforming most Gulf markets which opened down. "Saudi's upgrade is likely to bolster stock prices, and provide the trigger for a wider catch-up rally by regional exchanges," said Salah Shamma, head of investment, Middle East and North Africa at Franklin Templeton Emerging Markets Equity. "We expect about 20 percent of the actual free float in Saudi Arabia may be bought by foreigners over the inclusion period," he said, adding the free float of the market is around $200 billion. Given the size of Saudi's weighting on both providers' indices, its introduction is being staggered. FTSE will bring Saudi stocks on board in several stages between March and December 2019, while MSCI said on Wednesday the kingdom would enter in phases coinciding with index reviews in May and August 2019.

The new capital is also split between "passive", index-linked funds, which must invest according to the weighting set by the index provider, and "active" funds, which set their own limits.

Hussan expected 25-30 percent of the projected $45 billion of MSCI inflows to be from "passive" funds, which would buy into the market around the inclusion dates.

The bourse would now work to attract "active" MSCI money, and was already seeing inflows from "active" FTSE managers, he added.

MSCI added China shares to its emerging markets benchmark this month but inflows have so far fallen short of expectations. Fears of a China-U.S. trade war partly eclipsed the much-hyped addition of the world's second-largest equity market by capitalization.

ARAMCO LISTING

Inflows to Saudi Arabia could, however, be bolstered further by the listing of state oil giant Saudi Aramco IPO-ARMO.SE, which is expected to be the world's largest publicly-traded company. The timing of the initial public offering is uncertain, although next year is considered more likely.

"The expected increase in foreign flows will be extremely supportive of the investment environment, especially in the run up to an expected IPO of Saudi Aramco," said Salah Shamma of Franklin Templeton.

If Aramco goes public, MSCI capital inflows would double to around $90 billion, according to Usman Ahmed, managing director, investments, at Emirates NBD Asset Management.

While an Aramco listing would be a huge lure for foreign investors, Hussan points to the work the kingdom has done to make the Tadawul an attractive place to invest.

Among the changes announced this year include rules governing market-making, establishing a company which will ultimately clear all trades on the Saudi bourse, and introducing a new mechanism to set the closing price of shares that is more in line with international standards.

$1 = 3.7504 riyals Addditional Reporting by Davide Barbuscia, Hadeel Al Sayegh and Saeed Azhar in Dubai Editing by Catherine Evans

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