The Saudi banking sector is expected to gain the most from foreign investment inflows stimulated by the Emerging Market Index upgrades by both index providers MSCI and FTSE Russell, according to Richard Lee from Emirates NBD Asset Management.
In an interview with Citywire Middle East, the senior portfolio manager said Saudi banks have proven to be the most resilient on earnings thanks to a combination of improving net interest margins, moderate loan growth and stable cost of risks.
The Dubai-based company has been overweight in Saudi Arabia since early 2018, and is maintaining its bullish views on the Saudi Stock Exchange. The firm is also taking profits from selective names in the consumer space that have seen their catalysts fully played out following the recent rally.
On the flipside, Lee said the group has become less bullish on the petrochemicals sector. Falling chemical prices are expected to show up in the quarterly results of issuers, beginning early April, and that could continue over the next few quarters unless there is a material improvement in prices.
Lee is the lead manager of the $45.9 million Emirates NBD Saudi Arabia Equity fund which has exposure mostly to the financials and materials sectors. The fund’s top five holdings include Al Rajhi Bank, Samba Fianacial Group, Saudi Basic Industries Corp, Alawaal Bank and National Commercial Bank.
Data from Citywire Discovery showed that the fund returned 10.8% over three months ending 31 March and ranked nine out of 46 in the Middle East and North Africa category.
‘Our investment portfolios are dynamic, and we make changes whenever they are warranted,’ Lee said. ‘For the MSCI inclusion, our overweight call has benefited us over the last 15 months.
‘We believe market volatility could spike from May to August, and that will warrant certain adjustments to our portfolios closer to the time,’ he added.
The first phase of Saudi Stock Exchange's inclusion into the FTSE Russell and S&P Dow Jones Indices commenced in March. Inclusion of Saudi Arabia into the FTSE Russell Emerging Markets index will occur in five tranches over the next 12 months.
Lee is confident that the expected passive inflows of $12 billion for MSCI over two tranches in May and August, and an estimated $8 billion inflows over five tranches ending March 2020 from the FTSE Russell upgrade are going to happen, almost certainly.
‘But the flows from active managers, however, are unknown,’ he warned. ‘If they find the valuation of the Saudi market to be excessive, then foreign inflows could be significantly below their full potential of $40 billion and could be staggered over time until the valuation becomes more attractive.
‘Our view is that the active flows from the MSCI upgrade could be $10-15 billion over the next year,’ he concluded.