Saudi added to MSCI emerging markets index, huge inflows expected

Index provider MSCI has confirmed that Saudi Arabia will be added to its emerging markets index from June 2019, in a move widely expected to help the kingdom’s bourse attract greater investment.

MSCI said its decision came after the kingdom’s equity market – the largest in the GCC region with a market capitalisation of SAR1.95 trillion (around $520bn)- implemented a number of regulatory and operational enhancements.

“The proposal for inclusion received the support of the vast majority of international institutional investors that participated in the consultation,” it said in a statement.

The move also comes as Saudi prepares to list 5 per cent of state owned oil giant Aramco, which is anticipated to be the largest publicly-traded company globally.

Read: Saudi exchange counting on foreign funds to aid Aramco IPO

MSCI said 32 major Saudi stocks will gain emerging market status, giving the country a weight of approximately 2.6 per cent in its index.

The inclusion will follow a two‐step inclusion process.

The first step will take place during the May 2019 semi‐annual index review and the second step will take place as part of the August 2019 quarterly index review.

“International investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority (CMA) and the Saudi Stock Exchange (Tadawul) have demonstrated,” said Sebastien Lieblich, MSCI managing director and global head of Equity Solutions.

“Their expectation now is that the current privatisation effort in Saudi Arabia will continue to grow the investable opportunity set available to them and hence, all other things being equal, contribute to an increased weight of Saudi Arabia in the Emerging Markets Index in the future.”

Over the past three years, the CMA and Tadawul have implemented several measures to open the domestic equity market to international institutional investors.

Read: Saudi stock exchange adjusts rules to attract foreign funds

In 2015, the CMA introduced a new regulation allowing qualified foreign financial institutions to have direct holdings in the stock market. Earlier they were only allowed to invest indirectly using derivative instruments, such as P‐notes and/or SWAPs.

The regulation has since been changed twice by the CMA, based on feedback from international institutional investors.

The Tadawul also implemented a complete overhaul of its operating model, including the introduction of T+2 settlement and delivery versus payment, in April 2017.

“This important change was aimed at more closely aligning Tadawul’s operating model with international best practices and further easing access to the Saudi Arabian equity markets for international institutional investors,” said the statement.

The bourse also implemented a new closing price mechanism on May 27, 2018, moving from a value weighted average pricing to a closing auction.

Saudi’s inclusion in the emerging markets index could lead to about $45bn of new capital being invested into the kingdom, according to reports.

Tadawul’s CEO Khalid al-Hussan confirmed to Reuters that the stock exchange will work with stakeholders to ensure that the “substantial inflows of capital” will not adversely affect the market.

“We will start immediately to address all the activity – we will be ready,” Hussan said.

In March, MSCI’s rival index compiler FTSE Russell also decided to upgrade Saudi Arabia to emerging market status after the kingdom.

Read: Saudi to join FTSE emerging index from next March, attract billions

Last month, S&P Dow Jones said it was also consulting with investors regarding a potential emerging market upgrade for the Saudi market.

Read: S&P Dow Jones may lift Saudi Arabia to emerging market status

Saudi is the third GCC country to be granted MSCI emerging market status – the UAE and Qatar were included into the index in 2014.

MSCI has announced that it will evaluate the potential reclassification of Kuwait from frontier markets to emerging markets status in its 2019 annual review.