Published: Sat, June 23, 2018
Finance | By Cynthia Curry

Is Saudi Arabia's Inclusion In MSCI Overhyped?

Is Saudi Arabia's Inclusion In MSCI Overhyped?

"By supporting the inclusion of Saudi Arabia and Argentina in emerging markets, worldwide institutional investors confirmed that they are now able and ready to access and operate in these markets", Sebastien Lieblich, MSCI's managing director and global head of equity solutions, said in a statement. The MSCI emerging market index includes South Korea. The index provider says it makes its decisions in part based on investor experiences of accessibility, in addition to the presence of regulatory frameworks that are similar to those found in developed markets.

Numerous world's largest fund managers benchmark themselves against index compilers and will automatically invest in Saudi stocks following. That decision made Saudia Arabia one of the largest constituent countries in FTSE Russell's global coverage.

Investment bank EFG Hermes calculated that Saudi Arabia could see $30-45 billion of portfolio inflows in the next two years if it reaches the same level of foreign ownership in stock markets as the United Arab Emirates and Qatar. "It is a nationally great achievement, and a historic milestone on the journey of Saudi capital markets", he added. Neither decision was assured, and together, they could prompt a relief rally after a selloff knocked US$2.7 trillion from emerging economies since late January amid threats of a global trade war and higher U.S. rates.

Elkuwaiz said the Saudi bourse operator and CMA are making sure the necessary framework is in place for the $100 billion Aramco IPO. The Saudi market will probably face hurdles in retaining foreign money unless companies become more transparent, some traders said.

Last month, S&P Dow Jones said it was also consulting with investors regarding a potential emerging market upgrade for the Saudi market.

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The remains of some USA soldiers were last returned in 2007, when then-New Mexico Governor Bill Richardson visited Pyongyang. At the summit with Trump in Singapore, Kim pledged to work toward denuclearization in exchange for US security guarantees.

The country was added to the FTSE Russell Emerging Markets index in March and its inclusion in the MSCI index is expected to attract around $10bn in foreign passive flows. Foreigners are already net buyers of Saudi stocks, having poured in $3 billion this year through June 7, according to data from the stock exchange and compiled by Bloomberg. "This reflects roughly eight per cent of total inflows into broad emerging market equity funds so far into 2018", she said. "The prospects for more growth and foreign investment in Saudi Arabia are, in our view, substantial".

MSCI said this move "aims to further faciliate access" to the Saudi Arabian equity market for global institutional investors.

"We won't just see ETFs, we will see more diversity in investment vehicles".

There are now only two ETFs dedicated to Saudi Arabia; one from iShares and one from Invesco, with the latter launched earlier this month. Allowing foreign funds into the Saudi stock market will facilitate the sale of the planned IPO.

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