Index compiler FTSE Russell upgraded Saudi Arabia to emerging market status on Wednesday, a move that is expected to pump billions of dollars of foreign investment into the Arab region’s biggest stock exchange, which has a market capitalisation of $500 billion.
The promotion, which is expected to be followed by a similar move from index compiler MSCI in June, comes as the kingdom opens up its stock market further to foreign investors and implements reforms to meet international norms. The FTSE upgrade is expected to attract up to $5bn of fund inflows from passive investors, who track indexes and do not pick stocks, analysts said.
“Saudi Arabia is to be congratulated on the pace of the recent market reforms which are widely acknowledged as being positive for the country and capital markets development in the region,” said FTSE chief executive Mark Makepeace.
Saudi Arabia, the world’s biggest oil exporter, is courting foreign investors as part of reforms aimed at lowering dependence on hydrocarbon income and creating new revenue streams in the wake of the 2014 oil price slump.
The reforms being undertaken are under the umbrella of Vision 2030, an overarching economic roadmap that was revealed in 2016 and is being implemented in phases.
“We have worked closely with index providers and the global investment community to ensure that our capital market reform programme sets the highest regulatory standards to meet the needs of both current and prospective investors,” said Mohammed El Kuwaiz, chairman of Saudi Arabia’s Capital Market Authority. “Saudi Arabia’s inclusion in global benchmarks will further strengthen our position as the largest market in the Middle East region and we will work closely with the market during the transition period.”
Saudi Arabia will have a weighting of 2.7 per cent in FTSE’s Emerging Market Index, making it the largest Middle East market in the benchmark. It will also have a 0.25 per cent weighting in FTSE’s Global All Cap Index.
FTSE, which will include the kingdom in its indexes in five tranches with listing fully completed by December 2019, said the proposed initial public offering of a 5 per cent stake in Saudi Aramco, the world’s biggest oil producer, on the local Tadawul stock exchange could boost its weighting in the emerging market index to 4.6 per cent.
Tadawul is up 8.7 per cent so far this year on expectation of the upgrades.
Egyptian investment bank EFG Hermes expects the top 10 stocks that include Al Rajhi, Saudi Arabia's second-largest lender by assets, and Sabic, the region’s biggest petrochemical producer, to receive a big chunk of FTSE passive inflows.
Saudi Arabia implemented a slew of reforms to win its emerging market status.
In January, it made it easier for international investors to buy publicly-traded companies by halving the minimum requirement of qualified foreign investors to $500 million from $1bn. The kingdom also introduced short-selling last year and implemented the T+2 settlement, which means that securities settle two days after they are bought, in line with international norms.
“Year-to-date net foreign inflows [QFI and Swaps] totalled around 6.8bn riyals [Dh6.65bn] from 0.2bn riyals 2017 YTD) and thereby we expect significantly more inflows through both the MSCI and FTSE inclusions,” said Mazen Al Sudairi, head of research at Al Rajhi Capital in Riyadh. “Given that the inclusion is in tranches, we expect foreign investor flows to be sustained for an extended period.”
The FTSE’s action is expected to be followed by an upgrade in June from MSCI’s Emerging Markets Index, which is tracked by around $1.6 trillion in active and passively managed money.
“We expect Saudi Arabia’s inclusion into MSCI EM index will bring with it significant foreign investment,” said Bassel Khatoun, chief investment officer of MENA Equities at Franklin Templeton Investments (ME). “Saudi’s potential 5 per cent weight in the MSCI EM index may result in flows of around $80bn assuming benchmark weight or $40bn in equity flows excluding Saudi Aramco’s IPO.”
Meanwhile Kuwait, which was recognised as an emerging market last year by FTSE and will have a 0.4 per cent weighting in its index, will be listed in two tranches that will be complete by December this year. Kuwait, which was the best performing stock market in the Arabian Gulf last year, is expected to attract over $800m in inflows from FTSE trackers, EFG said.