Saudi Arabia has attracted $10.8 billion in foreign portfolio equity inflows so far this year, as foreign investors have significantly increased their exposure to Saudi equities ahead of the MSCI upgrade (Exhibit 1). The spillover was also evident in neighboring countries, as foreign equity inflows have increased in the UAE and Qatar.
The ongoing surge in inflows to Saudi Arabia stands in sharp contrast to other emerging markets (EMs). After a positive performance in March and April, renewed trade tensions sparked a sharp decline in equity flows to most EMs. According to our Capital Flows Tracker, May stands to be the worst performing month for EM equity flows since the taper tantrum (June 2013). Total equity outflows from EMs amounted to $14.7 billion in May, half of which come from China. During the same period, Saudi Arabia received more than $4.5 billion in foreign equity inflows, becoming the top equity investment destination among EMs (Exhibit 2).
Early positioning by investors has been relatively slow since the MSCI inclusion announcement last year due to concerns about policy uncertainty, high valuations for Saudi-listed firms, and reputational issues related to the Khashoggi incident. Nonetheless, it seems that investors have shrugged off concerns in the past few months. Were it not for global trade conflict and regional security concerns, inflows to Saudi Arabia would have been even higher. For the first half of this year, foreign equity inflows to Saudi Arabia are close to India and China, remarkable given that the Saudi’s econmy is just a fraction of the ones of India and China.