Saudi market index recalculation could force sell-off

RARE OPPORTUNITY: Sell-off will give investors chance of snapping up stocks in companies such as Sabic, EFG says. (Getty Images)

Saudi Arabia's plans to recalculate its stock market index to reflect the number of shares freely available for trading could force mutual funds to sell some of the largest stocks, analysts said.

Under Saudi rules mutual funds are required to limit their exposure to a single stock to 10% of their portfolio or the stock's weight on the index, whichever is larger.

The stock market regulator said this week it would switch to an index weighted on so-called free-floated stock from April 5 next year.

Shifting index weights to free-floated stock could require funds to sell shares such as Saudi Basic Industries Corporation (Sabic), Ibrahim Al-Alwan, deputy chief executive of Riyadh-based brokerage KSB Capital, said on Saturday.

Sabic, the world's largest petrochemical company by market value, has a weighting of around 27% on the index, which is now based on total capitalisation rather than the shares available for trading, according to Reuters data.

Only about 30% of Sabic's shares are free-float stock, EFG-Hermes investment bank said in a note. That would give Sabic a 17% index weight on a free-float basis and force any fund with an exposure of more than 17% to Sabic to sell when the new rules come into force, EFG said.

"The move to a free-float weighted index will, under the current rules, force funds to sell shares in order to comply with the maximum holdings rule," the Cairo-based investment bank said in a note dated December 13.

"We would view any resultant sell-off in blue chips as providing a rare entry opportunity into stocks that have risen some 25% on average this year," EFG said.

The new index weights would strip out the value of stock held by the government, foreign investors banned from trading without the permission of local partners, company founders during the period they are prevented from trading, and any investors owning 10% or more of a company, according to the Capital Markets Authority (CMA).

Companies with a larger proportion of free-float stock could benefit from more mutual fund buying.

About 55% of Al-Rajhi Bank's shares are available for trading, meaning its weight on the index could rise to 10.4%, EFG said. Rajhi's weight is now 9.7%, according to Reuters data.

"It will work both ways," said Al-Alwan. "We don't expect a major impact either way because mutual funds account for less than 10% of the investors on the bourse."

The index weights of the following stocks will rise by at least 0.5%, according to EFG:

Al-Rajhi Bank, Banque Saudi Fransi, Yamamah Cement, Saudi Industrial Investment Company, Sahara Petrochemical Company, National Company for Cooperative Insurance, Eastern Province Cement, Saudi Hollandi Bank, Samba Financial Group and Saudi Cement Company.

The index weights of the following stocks will fall by at least 0.5%, according to EFG:

Sabic, Saudi Telecom Company, Kingdom Holding, Saudi Electricity Company, Mobily and Arab National Bank. (Reuters)

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