Saudi MSCI inclusion will raise foreign stock ownership and boost inflows

The index compiler is expected to grant the kingdom emerging market status on Wednesday

Saudi Arabia's stock exchange, the Tadawul, was upgraded to emerging market status by MSCI in June. AP Photo
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The expected inclusion of Saudi Arabia in MSCI’s emerging market index could boost foreign stock ownership to above 10 per cent of market capitalisation and drive inflows of upto $40 billion by end-2019, analysts said.

“If Saudi follows frontier and emerging market peers then the amount of the market owned by foreigners could, over a few years, rise to about 10 per cent,” said Hasnain Malik, managing director of equity strategy at emerging market-focused investment bank Exotix Capital.

Foreign ownership, which currently is less than 2 per cent, could rise to upto 12 per cent by the end of 2019, said Mohamad Al Hajj, vice-president and head of Mena equity strategy at lender EFG Hermes.

Index compiler MSCI is to announce whether or not it will grant Saudi Arabia emerging market status on Wednesday, after the kingdom was put on a watchlist for inclusion last year.

The MSCI promotion would follow a similar move by FTSE Russell in March and be 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.

MSCI EM status would help the country attract billions of dollars into the Middle East and North Africa’s biggest stock exchange, which has a market capitalisation of about $500bn.

“The FTSE Russell decision in March was an important achievement for the kingdom, but it is the MSCI upgrade that will truly help catalyse its Vision 2030 efforts,” said Salah Shamma, head of Mena Investment at Franklin Templeton Emerging Markets Equity.

“Since MSCI added it to its watch list in June 2017, the necessary infrastructure has been upgraded and we believe all required criteria have been met.”

The decision would “ultimately help transform the kingdom into one of the largest and most attractive emerging markets in the world,” he added.


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Investment manager Franklin Templeton estimates the kingdom’s inclusion in the MSCI EM index would bring additional flows of around $35bn into the market. Around $3bn in foreign flows have already come into the Saudi market in 2018, taking total foreign investment in the Tadawul stock exchange to approximately $9bn. The potential listing of a five per cent stake in Saudi Aramco, the world's biggest oil producer, would add another $50bn in foreign flows depending on valuation, Franklin Templeton said.

Mr Al Hajj said he expected additional inflows of between $30bn-$45bn into Saudi Arabia by the end of 2019 as a result of the anticipated upgrade. His estimate does not include the impact of an Aramco listing. “From this year, stronger US dollar and rising US rates could continue to attract buyers, especially for Saudi banks,” he said.

Meanwhile, Rami Sidani, head of Mena investments at Schroders Investment Management, estimated additional inflows of $20bn by the middle of next year if Saudi Arabia is included in the index. “Market performance has been very strong since the beginning of 2018, and, with MSCI inclusion along with an improving Saudi economy, we expect the market to outperform other emerging markets,” Mr Sidani said. MSCI EM status would be “game changing” not just for the kingdom but the entire region, he added, positioning it as a centre for foreign capital.

Saudi Arabia's Tadawul stock exchange is up by about 15 per cent year-to-date on anticipation of inclusion in the emerging markets benchmarks.

“Higher oil prices, continuing evidence of positive economic reform, foreign inflows and insulation from the currency concerns buffeting other emerging markets should all drive the Saudi equity market higher this year,” added Mr Malik.