Saudi MSCI inclusion will raise foreign stock ownership and boost inflows

Saudi Aramco Clears Another IPO Hurdle |

Saudi Aramco Clears Another IPO Hurdle |

Global index compiler MSCI is considering including Argentina and Saudi Arabia in its emerging market indexes at a review of its widely-tracked benchmark on Wednesday, and could potentially announce candidates that may join its indexes in future. Foreigners were net buyers of Saudi stocks in nearly every week this year, with net inflows of about 11.4 billion riyals ($3 billion) as of June 7 on aggregate for 2018, according to data compiled by Bloomberg.

MSCI said that it chose to reclassify Saudi Arabia following additional reforms made by the Kingdom's Capital Market Authority (CMA) to align its stock market with others worldwide. Saudi Arabia hopes to sell 5 percent of the world's largest oil exporter, valuing the company at more than $2 trillion.

Meanwhile, the MSCI Argentina Index has also been reclassified from Frontier Markets to EM status, following investors' confidence in the country's ability to maintain current equity market conditions. Analysts expect an MSCI upgrade could attract around US$10 billion in passive fund flows.

MSCI's managing director Sebastien Lieblich was quoted as saying "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 and the Saudi Stock Exchange have demonstrated".

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Khalid al-Hussan, CEO of Tadawul, told a news conference in Riyadh that MSCI's move had created market capacity to absorb liquidity and would be the main element in feeding new IPOs. "We believe such factors could be supportive of higher mid-cycle valuations", they said. "The prospects for more growth and foreign investment in Saudi Arabia are, in our view, substantial". If the country imposes any restrictions such as capital or FX controls then MSCI will review its reclassification decision. Saudi Arabia has an exciting investment story and we want to ensure we are part of its ambitious agenda to reform its capital market.

An upgrade will allow funds that track more than $1 trillion to invest in the nation's stock market, leading to about US$3.5 billion of inflows, according to Ernesto Allaria, the president of stock operator BYMA. The move comes at a time that investor interest in the Gulf state which opened its stock market to foreign investors in 2015 is increasing.

"From a market liquidity standpoint, connecting the Saudi market to the rest of the world and having the free movement of capital from global investors to the Saudi market only helps a listing of the size and scale of Saudi Aramco", he said. "With an increased number of worldwide investors set to participate in the market, we see potential for increased corporate transparency [eg, more detailed disclosure], stronger interaction with investors and growing awareness of GEM peer groups among corporates [thereby enhancing performance]". "We note, the MSCI Saudi index is heavily weighted towards the Saudi banks and materials companies (petrochemicals, mining and cement)".

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