Saudi Arabia is expected to be included in the FTSE Russell emerging market index on Wednesday in a move that along with the possible inclusion in the MSCI Emerging Market index is set to attract billions of dollars into the kingdom’s stock market.
“The FTSE upgrade should bring in $5 billion from passive funds that track the FTSE benchmark – we expect the actual upgrade to take place in two equal tranches in 2019,” said Simon Kitchen, head of strategy at the Egyptian investment bank EFG-Hermes.
“The upgrade cycle has been a major driver of Saudi stocks this year, driving strong year-to-date performance. We expect that to continue. The reforms that make a FTSE upgrade possible will all make it more likely that MSCI upgrades Saudi Arabia at the annual market review in June 2018."
The prospect of the inclusion of Saudi Arabian stocks in the FTSE and MSCI Emerging Markets Index would boost foreign participation in the local market significantly over the next couple of years, market participants say.
Saudi Arabia's Tadawul, the region's biggest equity market, has surged 9.9 per cent so far this year amid investor anticipation of inclusion in the benchmarks, a rebound in oil prices and higher government spending.
Analysts expect investors who track indexes, typically known as passive investors because they do not pick stocks, will buy between $10bn and $12bn of Saudi equities as a result of the upgrades. Meanwhile investors that pick stocks, called active investors, will invest a further $30bn to $35bn.
Saudi Arabia is endeavouring to revive its economy after several years of low oil prices that curtailed job creation and growth.
The measures include a reduction of energy subsidies, plans to raise taxes such as a VAT and selling off state assets including a 5 per cent stake in Saudi Aramco, the world's biggest oil producer whose sale may fetch as much as $100bn.
The country’s financial regulators are also streamlining regulations and bringing capital markets in line with global norms. As well as introducing T+2 settlement, which means that securities settle two days after they are bought, the country’s Capital Market Authority also introduced Nomu, a parallel market for smaller cap companies. It also enabled securities borrowing and lending, and the adoption of International Financial Reporting Standards for listed companies.
Hasnain Malik, head of Equity Strategy at Exotix Capital, said that some of the money that has been earmarked by fund managers may have already entered the market and that the biggest beneficiaries would be the heavily traded large capitalisation stocks.
"All of the potential constituents should benefit but there is likely a disproportionate inflow into the largest, most liquidly traded ones like Al Rajhi and Sabic," he said.