Saudi Aramco IPO to lift its weighting in EM index, MSCI says

Aramco listing would raise kingdom’s weighting to 4.4% from 2.6%

Saudi Arabia was awarded landmark emerging market status by index compiler MSCI on Wednesday, paving the way for billions of dollars of foreign inflows to the kingdom's capital markets and raising the investment profile of the Middle East. Hasan Jamali / AP PhotoShow less

Saudi Aramco's initial public offering would swell Saudi Arabia’s weighting on the MSCI emerging markets index and, even without that, the kingdom’s inclusion remains “very important,” an MSCI official said on Thursday.

The potential listing of a five per cent stake in Saudi Aramco, the world's biggest oil producer, in 2019 would further cement the Middle East's international profile, raising the kingdom's weighting to "up to 4.4 per cent", Sebastien Lieblich, the index compiler's managing director and global head of equity solutions, told The National. He was speaking a day after MSCI granted the kingdom the coveted emerging market status, giveing its stocks a representative weighting on a pro forma basis of approximately 2.6 per cent of the index with 32 securities.

Saudi Arabia winning of the landmark inclusion in the MSCI emerging markets index paves the way for an estimated $40 billion of additional flows to its $500bn-plus stock market. Inclusion will take effect in two phases, in May and August 2019.

“It’s not every day a market the size of Saudi Arabia opens up to foreign investment,” said Mr Lieblich. “There were two large equity markets that used to be closed in past years – Saudi Arabia and China – and now both have opened up.”

For the region, this is also a “very significant step” as Saudi Arabia is the main market in terms of size and liquidity, and its inclusion will raise the profile of the region and attract further investment, said Mr Lieblich.

“To be blunt, we know some investors were consciously overlooking the Middle East because they thought it was 'too small', but that view might change,” he added.

Investment manager Franklin Templeton Investments also said the listing of “the most valuable company in the world” would increase Saudi’s weight in the index to over 4 per cent and add another $50bn in foreign flows depending on valuation.

The upgrade “will prove a transformative catalyst for exchanges amid rising global investor interest,” said Salah Shamma, head of Mena investment at Franklin Templeton Emerging Markets Equity. “With improving fundamentals such as positive corporate earnings, higher oil prices and non-oil GDP growth, we believe a re-rating of regional markets is also warranted.”

The MSCI promotion follows a similar move by FTSE Russell in March and is a second achievement for the kingdom, which has been implementing a series of reforms to develop its capital markets in line with its Vision 2030 economic diversification strategy.

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Two game-changing reforms the kingdom made that prompted inclusion were the qualified foreign investor (QFI) regulations stating how much of a Saudi company foreign investors can own, and the complete overhaul of the Tadawul operating model in 2017, bringing it into line with international standards, Mr Lieblich told The National.

Saudi regulator the Capital Market Authority said the MSCI inclusion was an important milestone marking further integration of the kingdom into global capital markets. “The decision will enhance the diversity of the investor base as well as the liquidity of the Saudi capital market,” CMA chairman Mohammed El Kuwaiz said.

“We will continue to develop the capital market to ensure that it facilitates investments, promotes confidence and protects investors and market participants.”

On Wednesday, the MSCI launched for consultation its reclassification proposal for Kuwait, proposing that Saudi Arabia's neighbour also be awarded emerging market status.

Publication of the year-long consultation demonstrates the index compiler's confidence in Kuwait's ongoing capital market reforms, Mr Lieblich told The National. "But it does not mean they should think everything's done; they should continue their enhancement plans," he added.

“The more they make the market accessible, the greater the endorsement from the international community in potentially including them in the emerging markets index.”