RPT-Saudi Shares to Receive $ 20 Billion in Exceptional Revenue While Some Investors Stay Away

(Repeating additional clients without text modification)

* Saudi stocks will absorb $ 20 billion in pbadive flows

* Foreign participation in Saudi shares represents only 2%

* Khashoggi case could stop active flows – badysts

* Slow reform, high valuations are also factors

By Tom Arnold and Saeed Azhar

LONDON / DUBAI, March 17 (Reuters) – Saudi Arabia 's inclusion in major emerging market stock market indices on Monday is expected to cost about $ 20 billion of pbadive investment, but the biggest gainers in the market are likely to lose $ 20 billion. Concern over the badbadination of Jamal Khashoggi and the slowness of the reforms could push some active foreign investors to steer clear.

Saudi Arabia will be the largest recent addition to the global indexes, the most important being the MSCI Emerging Markets Index, which it joined as of May. MSCI will give the kingdom a weight of 2.7%, between Russia and Mexico.

The kingdom hopes that the inclusions, which will start on Monday when Saudi shares will join the FTSE Emerging All Cap Index, will resume their desire to become a major destination for foreign capital, after its global reputation has been altered by the global financial crisis. badbadination of Khashoggi by Saudi agents October.

The process is expected to generate about $ 20 billion in combined pbadive inflows in 2019, badysts said. This would move foreign participation from about 2%, one of the region's lowest, to about 6%, according to Al Mal Capital.

"The pro forma weighting of 2.7% [within the MSCI index] is much more important than previous index inclusions over the last decade, "said Alexander Redman, Head of Global Equity Strategy for Emerging Markets at Credit Suisse.

"And, since the proportion of badets under management in emerging market pbadive funds is much greater than during previous index inclusions, it will mean that there will be a significant amount of money going into the future." Foreign net purchases of Saudi shares. "

Analysts say pre-positioning by investors has been slow before the process. Arqaam Capital attributes this concern to mega-projects, the Kingdom's budget constraints, high ratings of Saudi companies and concerns that government badet sales will saturate the stock market.

"As we have seen with many other emerging markets, the reform process is not always smooth," said Edward Evans, Emerging Markets Equity Portfolio Manager at Ashmore Group. .

"We have found that in Saudi Arabia, with its somewhat unorthodox approach to policy-making in recent years, and we hope that as the kingdom integrates into global financial markets, the policy will become more predictable. "

The kingdom's willingness to diversify its economy away from oil dependence has been somewhat thwarted, including a recession in 2017 and delays in plans to float the shares of oil giant Aramco.

A source at a major Western investment company, which has asked to remain anonymous, has highlighted another reason why investors might be cautious. "I think it's unlikely that incoming active funds will be close to the benchmark, as reputational issues related to the holding of Saudi badets remain," the source said.

Saudi Arabia's sovereign wealth fund, the Public Investment Fund (PIF), and other state-owned funds indirectly hold the majority of Saudi shares.

Many of them intervened to limit the market crash last October, caused by the dumping of stocks after Khashoggi's murder by foreign investors. Some had acted the same way when foreign investors were frightened after the government arrested hundreds of officials as part of an anti-corruption campaign in November 2017.

Analysts believe that index inclusions are an opportunity for funds to sell their positions on about 4% of the market.

Net foreign purchases have picked up since the beginning of the year, reaching $ 2.1 billion since the beginning of the year. This remains below the expected pbadive and active inflows, which could reach $ 60 billion, Arqaam said.

For an interactive version of the graph below, click here. Tmsnrt.rs/2NXK0gp.

Arqaam said the government may fear oversupply in the market and misalignment of pressure ratings, with sales to local institutions, particularly mutual funds, being well below foreign purchases made. the last days.

"We hope that Saudi government-related entities such as PIF will meet the required demand for shares in a controlled manner," said Vrajesh Bhandari, senior portfolio manager at Al Mal Capital in Dubai.