Saudi MSCI inclusion will raise foreign stock ownership and boost inflows

Daniel Fowler
June 23, 2018

That's how much the asset class will expand after MSCI said on Wednesday it will add both Saudi Arabia and Argentina to its equity index of developing nations.

He said passive investors tracking the MSCI index will only get access to the Saudi market next year, although active investors can participate in IPOs now.

Saudi Arabia's MSCI index.MISA00000PUS has risen almost 20 percent this year, while Argentina's.MIAR00000PUS is down almost 40 percent from its 2018 high hit in January.

In March, MSCI's rival index compiler FTSE Russell also chose to upgrade Saudi Arabia to emerging market status after the kingdom.

The ETF tracks the performance of the MSCI Saudi Arabia 20/35 index - which comprises 22 large- and mid-cap stocks and accounts for around 85% of the free-float market capitalisation in Saudi Arabia.

"The addition of Saudi Arabia will add diversification to MSCI emerging market indices that are increasingly weighted to South Asian and tech-heavy markets such as China, South Korea, and Taiwan", Todd Rosenbluth, director of fund research at New-York based CFRA, told Reuters.

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

LONDON, June 21 (Reuters) - Trade tensions and a stronger dollar sent jitters through emerging markets on Thursday with currencies plumbing multi-month lows and stocks resuming their recent falls.

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"That means up to 8.36 trillion won would come out of the local stock market starting next year", the analyst added.

Rosenbluth said he expects investors to add exposure to the iShares MSCI Saudi Arabia ETF (KSA.P) and Global X MSCI Argentina ETF (ARGT.P) ahead of the implementation of the changes.

Undoubtedly, the cherry on the Saudi privatization pie will be the successful IPO of Aramco, the world's largest oil company by reserves.

Modernisation of the Saudi stock market is part of a broader plan spearheaded by Crown Prince Mohammed Bin Salman to steer the nation's economy away from oil and diversify the government's sources of revenue.

"The expected increase in foreign flows will be extremely supportive of the investment environment, especially in the run up to an expected IPO of Saudi Aramco", said Salah Shamma of Franklin Templeton. 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.

Hollands added: "The effect on Frontier market fronts is a lot more dramatic, as Argentina represents nearly 20% of the Index, which has already been profoundly reshaped in recent years by the upgrading of UAE and Qatar to EM status".

On assuming office in December 2015, president Mauricio Macri declared Argentina open for business and introduced sweeping pro-market reforms. The Saudi market will probably face hurdles in retaining foreign money unless companies become more transparent, some traders said. Saudi Arabia should focus on reaping the economic benefits from the reforms being undertaken now.

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