Saudi Arabia passed a major barrier to being classified by MSCI Inc. next year as an emerging market, an achievement that may draw billions of dollars to its traded companies through eventual inclusion in some of the biggest global stock indexes.

The kingdom, already boasting the Middle East’s largest equities market, was added to MSCI’s watch list for a potential upgrade in 2018, the index provider announced on Tuesday. More than $1.5 trillion in assets are benchmarked by money managers to the MSCI Emerging Markets index family.

The victory follows a years-long campaign by the country’s capital markets regulator and local stock exchange to carry out investor-friendly rule changes. They included facilitating access to foreigners and implementing T+2 settlement in order to attract funds from abroad. The moves coincide with the kingdom’s effort to diversify the economy away from oil, its main export.

“Following the introduction of these major enhancements to the accessibility of the Saudi Arabian equity market, MSCI will be consulting with international institutional investors to gather informed feedback on their practical experience of accessing the Saudi equity markets and in particular on the effectiveness of the recently implemented enhancements,” the index provider said in a statement Tuesday.

Should Saudi Arabia win classification by MSCI next year, its shares could see inflows on the order of $9 billion, according to calculations by HSBC Holdings PLC.

The addition would place Saudi Arabia "in good stead to achieve its Vision 2030" transformation plan, Georges Elhedery, chief executive officer for the Middle East and North Africa at HSBC, said by email. "Passive inflows into Saudi equities could draw approximately $9 billion. This has the potential to rise even further if active funds increase their allocations."

The upgrade may attract investor interest to markets across the Middle East and North Africa ahead of the planned share sale of Saudi Aramco, the world’s biggest oil-exporting company, according to Mohamad Al Hajj, an equities strategist at EFG-Hermes in Dubai.

Inclusion in MSCI’s developing-country indexes would “put Saudi Arabia in the top 10 emerging markets, even excluding Aramco,” Al Hajj said, adding that passive inflows alone would be equivalent to two-and-a-half to three current active holdings by foreigners in the Saudi market. “It would finally place Middle East, North Africa on the map as an important subset of emerging market and EMEA."

Saudi Arabia allowed money managers outside the Gulf to own local shares directly only two years ago. Since then, authorities have relaxed the guidelines even more, yet total foreign ownership has stalled at about 5 percent.

As crude oil prices declined this year, the Tadawul gauge has dropped, lagging behind an average of peers as measured by the MSCI Emerging Markets Index, which increased 17 percent through June 19.

The addition to the watch list should result in “substantially improved valuations, liquidity and foreign inflows to the country’s market,” according to Jaap Meijer and Michael Malkoun, analysts in Dubai at Arqaam Capital Ltd. They estimate Saudi Arabia would have a weighting of 2.2 percent in that emerging markets index, excluding Aramco.

Source:
courtesy of BLOOMBERG

by Filipe Pacheco and Matthew Martin

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