International Finance

Portfolio investments lead foreign inflows into Saudi Arabia

Despite weaker performance from its banking and energy, investors show interest in Saudi Arabia

Portfolio investments will be the major source of foreign inflows into Saudi Arabia, according to experts. Despite weaker performance from Saudi Arabia’s two largest sector- banking and energy sector; investors show interest in Saudi Arabia due to the portfolio re-allocation benefits.

Boban Markovic, senior analyst at the Institute of International Finance (IIF) told the media that the reason for portfolio investors’ interest in Saudi Arabia’s stocks can be explained by portfolio re-allocation benefits. Monthly returns on investment in Saudi Arabia’s stock index show lower sensitivity to other emerging and developed markets.

In 2019, Saudi Arabia has attracted $18 billion in foreign portfolio equity inflows. The foreign equity inflows to Saudi Arabia surpassed those of India and China, a remarkable achievement since China and India are among the biggest economies in the world.

The spike can also be attributed to the Tadawul’s second phase of MSCI emerging markets index inclusion. However, many argue that equity markets attract investors after upgrade announcements but retract after the upgrade itself.

Garbis Iradian, Chief Economist, Mena told the media that, “While Saudi Arabia has shown a similar increase after the announcement, there is a reason to think that a major correction will not necessarily occur, unless global oil prices fall to well below $55 per barrel. First, foreign equity inflows remained high after the first phase of the upgrade. Second, the Saudi market is bigger, and more liquid compared to other markets in the region that joined the MSCI emerging market index recently. Third, many diversified portfolios are unlikely to ignore Saudi Arabia as the EM investment destination.”

The Tadawul is expected to attract $5 billion in equity inflows as the bourse completes the second phase of its inclusion into the MSCI emerging markets index.

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