MSCI Lifts Argentina, Saudi Arabia To Emerging Markets Status

Darnell Taylor
June 23, 2018

The MSCI Saudi Arabia Index will have a weighting of approximately 2.6 percent in the emerging markets index, with 32 securities, following a two-step inclusion process in May and August next year.

These two countries will join the ranks of South Africa, Brazil, China, India and Turkey.

Index provider MSCI said on Wednesday it will reclassify Argentina as an emerging market and begin including Saudi Arabia in that classification, sharply broadening the investor base for both countries in a move that could be supportive of their equity markets. Morgan Stanley Capital International (MSCI) announces its MSCI 2018 Market Classification Review, which determines the inclusion of each country into the MSCI indexes.

Saudi Arabia's Tadawul stock exchange is up by about 15 per cent year-to-date on anticipation of inclusion in the emerging markets benchmarks.

"International investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority (CMA) and the Saudi Stock Exchange have demonstrated". HSBC was among the first qualified foreign investors to trade Saudi stocks directly three years ago. "From this year, stronger U.S. dollar and rising U.S. rates could continue to attract buyers, especially for Saudi banks", he said.

The upgrade announcement was widely expected by the region's investment community, following a similar emerging markets upgrade announcement by fellow index provider FTSE Russell in March.

The largest market in the Middle East, Saudi represents a market cap of $523bn, around 5% of which is foreign capital.

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"Since then, it eased requirements for these investors with measures such as lowering the minimum amount of assets under management to get the status of qualified foreign investors, or QFI, and aligned trade settlement times with worldwide standards", said Bloomberg.

Saudi Arabia may see inflows of as much as US$40 billion in the coming year, Khalid Al Hussan, chief executive officer of the bourse, said in a phone interview.

"Higher oil prices, continuing evidence of positive economic reform, foreign inflows and insulation from the currency concerns buffeting other emerging markets should all drive the Saudi equity market higher this year", added Mr Malik.

"Their expectation now is that the current privatisation effort in Saudi Arabia will continue to grow the investable opportunity set available to them and hence, all other things being equal, contribute to an increased weight of Saudi Arabia in the MSCI Emerging Markets index in the future".

The move follows a series of stock market reforms by Tadawul and its regulator, the Saudi Capital Market Authority, to make it easier for foreigners to invest.

Still, buyers from overseas have been coming in slowly overall, with total foreign ownership of Saudi stocks at about 5 percent - below that of neighbors such as Qatar and the United Arab Emirates. The sale, originally planned for the second half of this year, is now likely in 2019, the kingdom's oil minister said last month.

Saudi Arabia's state-run oil firm Aramco, which has the world's biggest corporate value, is expected to be listed on the Saudi stock market within this year at the earliest. The Saudi market will probably face hurdles in retaining foreign money unless companies become more transparent, some traders said.

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