Saudi stocks to attract around $20bn and double foreign ownership amid upgrade

FTSE Russell, S&P Dow Jones Indices and MSCI are elevating the kingdom to emerging market status

On Monday, FTSE Russell will start a phased-inclusion of Saudi Arabia into its emerging market index. AFP

The Saudi stock market, the largest in the Arab region, will double its foreign ownership levels and attract as much as $20 billion in international investments as it is upgraded by global benchmarks to emerging market status, analysts said.

On Monday, FTSE Russell will start a five-part phased inclusion of Saudi Arabia into its emerging market index, where it will have a 2.9 per cent weighting, becoming the fourth Arabian Gulf to be included in the gauge. S&P Dow Jones Indices also started its two-part phased inclusion, while MSCI will include the kingdom in May, also in two phases, with a weighting of around 2.6 per cent in its emerging market index. Saudi Arabia will be the third Gulf country to be included in MSCI following the UAE and Qatar’s joining of its emerging market index in 2014.

Around $20bn in foreign inflows are expected to come to the $500bn-plus Saudi market as a result of all three inclusions in emerging market benchmarks, with the biggest investments linked to inclusion in MSCI’s EM Index, the most widely tracked gauge by international investors, according to analysts.

These inclusions are “transformational not only for Saudi Arabia but the entire region”, said Rami Sidani, head of frontier investments at German asset manager Schroders.

“Between Saudi, the UAE and Qatar, these Gulf countries will represent more than 5 per cent of global MSCI EM benchmark, which is basically a weight that cannot be disregarded. So it will put these markets further on the global investment map and set to attract large inflows into these markets.”

Saudi Arabia, the world’s biggest oil exporter and largest Arab economy, has undertaken a slew of reforms to earn its emerging market status.

Last year, the country’s Capital Market Authority 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.

As well as introducing T+2 settlement, which means that securities settle two days after they are bought, the CMA also launched Nomu, a parallel market for small cap companies as well as the adoption of International Financial Reporting Standards for listed companies.

“Between MSCI and FTSE we expect at least a $17bn boost to foreign ownership to around twice the current level,” said Mohamad Hajj, head of MENA strategy at EFG Hermes, Egypt’s largest listed investment bank.

“S&P will likely be the smallest of the events driving $100mn in total, while MSCI will be the largest driving at least $11bn. Various participants will be watching and participating in the event including MENA/GCC funds, EM passive and active funds, and global hedge funds."

Saudi Arabia’ stock market is the best performing Gulf market so far this year, up nearly 10 per cent.

The kingdom 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 taken are under the umbrella of Vision 2030, an overarching economic road map that was revealed in 2016 and is being implemented in phases.