Saudi Arabia pushes into portfolio awareness

Jonathan Boyd
clock • 4 min read

Saudi Arabia may have been dumped out of the World Cup, but the investment case for buying Saudi assets has taken a giant step forward with the news that it has been entered into the ubiquitous MSCI Emerging Markets index following the latest index review, generating generally positive reaction by investors around Europe and beyond.

MSCI said that the country will make up “approximately 2.6% of the index with 32 securities, following a two‐step inclusion process. The first inclusion step will coincide with the May 2019 semi‐annual index review. The second step will take place as part of the August 2019 quarterly index review.”

Reacting to the review news, Dominic Bokor-Ingram, portfolio adviser, Fiera Capital, said: “Saudi Arabia is the largest, most liquid emerging market in the world with practically no foreign involvement to date. Saudi is only 2% owned by foreign investors with the next lowest emerging market, Qatar, being 10% owned and markets like Turkey being 65% foreign owned.”

“Saudi Arabia’s elevation to EM status will be welcomed by many investors as a new and undiscovered investment opportunity. The upgrade is hugely positive for the Saudi market and the future potential for Saudi companies to reduce their cost of capital further by having greater access to equity financing. The two key reforms mentioned in the initial review: increase in foreign access to the market particularly for international institutional investors, and expansion of the settlement cycle, have been in effect for over a year, with the focus of the consultation on implementation and effectiveness. The next major milestone in the Saudi reform and restructuring process is the 24 June this year when women will officially be able to drive for the first time.”

Bassel Khatoun, managing director, Frontier and MENA, Franklin Templeton Emerging Markets Equity, said: “Saudi Arabia is a reform story on many levels, and its upgrade to MSCI emerging market status is a huge win for its capital market. Since MSCI added Saudi to its watch list in June 2017 the kingdom’s Capital Markets Authority and Tadawul have continued to make substantial modifications to its equity market infrastructure and accessibility to ensure it met the criteria for this MSCI EM inclusion.”

“The positive decision will be extremely supportive in attracting more foreign investment. With $1.9trn of funds tracking MSCI’s EM index, the 2.6% that Saudi will initially command is likely to result in equity flows of approximately $40bn. The IPO of Saudi Aramco could also potentially add another $50bn of inflows into the market. Foreign investors’ portfolio holdings in the Tadawul currently account for a mere $9bn, making the level of potential inflows into Saudi Arabia quite unprecedented.”

“We anticipate that the bulk of new investment that will enter the Kingdom will come from other emerging market constituents, the largest of which are China, Korea and Taiwan. In our view, this is just the start of the journey in terms of deepening Saudi Arabia’s equity market. We also expect that foreign ownership levels will substantially increase, which at approximately 2%, significantly lag those of the UAE and Qatar (14% and 9% respectively). The prospects for more growth and foreign investment in Saudi Arabia are, in our view, substantial.”

“The next significant milestone in Saudi will be the much anticipated IPO of Saudi Aramco, an event that we believe will trigger more privatizations across the kingdom and set the standard for local corporate governance and transparency. While Saudi has already implemented reforms to align better with international standards, an Aramco listing on a deep, actively traded market will attract a broader range of global investors who will help further enhance corporate governance frameworks.”

“The kingdom has an exciting reform story to tell and the seat it has now secured at the MSCI emerging market table is just reward for the improvements made to its equity market infrastructure.”

Vanessa Robert, a vice president and senior credit officer at Moody’s Investors Service, said: “The inclusion of Saudi stocks in the MSCI Emerging Markets index will facilitate investors’ accessibility to the local stock market and will attract foreign investments into Saudi Arabia. International asset owners managing passive investment strategies in the emerging market space will see their investment universe broadened. USD1.9trn in assets are currently benchmarked to the MSCI Emerging Markets index suite.”