Saudi Arabia upgraded to MSCI Emerging Markets, to join China, India others

The MSCI logo. Photo: Reuters
Saudi Arabia’s efforts to modernize its stock market and attract billions in investments were recognized by MSCI Inc., which announced on Wednesday the addition of the kingdom to its group of emerging markets.

The index compiler, which has more than $1.9 trillion in assets benchmarked to its group of emerging markets indexes, will reclassify Saudi Arabia with implementation of its indexes starting in June 2019, it said. The nation was added to a watch list for a potential upgrade last year, and will now join nations including China, India, Turkey, South Africa and Brazil. Separately, MSCI said it would upgrade Argentina to the category as well.

“By supporting the inclusion of Saudi Arabia and Argentina in Emerging Markets, international institutional investors confirmed that they are now able and ready to access and operate in these markets,” said Sebastien Lieblich, MSCI Managing Director and Global Head of Equity Solutions.

Analysts estimate MSCI’s decision on Saudi Arabia will lead to billions of dollars from money managers worldwide and help improve liquidity in the biggest stock market in the Middle East and Africa. The Saudi capital markets regulator and local stock exchange have implemented a series of changes during the past few years aimed on adapting the bourse to international standards and requirements by index compilers.

Inclusion “is a game-changer for Saudi Arabia’s capital markets,” said Antoine Maurel, head of global markets for Middle East, North Africa and Turkey at HSBC Bank Middle East Ltd., who estimates it will lead to $35 billion of inflows. “This will create a much deeper and more liquid market,“ he said. HSBC was among the first qualified foreign investors to trade Saudi stocks directly three years ago.

Modernization of the stock market is part of a broader plan spearheaded by Crown Prince Mohammed Bin Salman to steer the nation’s economy away from oil and diversify the government’s sources of revenue. That includes selling shares in government-owned Saudi Aramco, which is expected to stage an initial public offering in Riyadh that could be the world’s biggest. FTSE Russell upgraded the country to emerging markets status in March.

Gradual Opening

Saudi Arabia opened its $524 billion stock market to foreign investors three years ago. Since then, it eased requirements for these investors with measures such as lowering the minimum amount of assets under management to get the status of qualified foreign investors, or QFI, and aligned trade settlement times with international standards.

Mohamad Al Hajj, equities strategist at the research arm of EFG-Hermes Holding, estimated that upgrades by FTSE and MSCI could lead to passive and active inflows of between $30 billion and $45 billion. Franklin Templeton Investments announced earlier this week that some of its funds have won approval as QFI in Saudi Arabia, while others are in the pipeline for authorization.

Speculation that an upgrade was coming helped boost the Tadawul All Share Index by about 13 percent this year, compared with a drop of about 6 percent for the MSCI Emerging Markets Index during the same period. Foreigners were net buyers of Saudi stocks in almost every week this year, with net inflows of about 11.4 billion riyals ($3 billion) as of June 7 on aggregate for 2018, according to data compiled by Bloomberg.

Still, buyers from abroad have been coming in slowly overall, with total foreign ownership of Saudi stocks at about 5 percent -- below that of neighbors such as Qatar and the United Arab Emirates. Both have been members of the MSCI EM index since 2014.

The upgrade sets the stage for the Aramco IPO, another event that could boost liquidity. The sale, originally planned for the second half of this year, is now likely in 2019, the kingdom’s oil minister said last month. Saudi Arabia hopes to sell 5 percent of the world’s largest oil exporter, valuing the company at more than $2 trillion.

Saudi market will probably face hurdles in retaining foreign money unless companies become more transparent, some investors said. Mark Mobius, who has gained a reputation for being optimistic more often than not on emerging markets prospects, said earlier this month he isn’t completely bullish on Saudi Arabia because the range of offerings is limited and a number of restrictions are still in place.

Last year’s detention of princes and dozens of officials for about three months, in what Saudi authorities called a crackdown on corruption, unnerved investors, and some cite a lack of transparency and doubts over corporate governance as reasons to stay away.

In the past three years, the Saudi stock market “has become much more open and much closer to international standards," said Mazen Alsudairi, head of research at Al Rajhi Capital Co. in Riyadh. “Saudi’s inclusion in MSCI will definitely prompt large global investors to invest in the Kingdom, with a rub-off effect on the whole region.”

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