Saudi Tadawul enters watch list for MSCI EM index

Global index compiler MSCI on Tuesday added Saudi Arabia to a watch list for a potential upgrade to emerging market status, a move that could open the doors to billions of dollars of funds inflow.

MSCI said that it will include the MSCI Saudi Arabia Index in its 2018 review for a potential inclusion in the MSCI Emerging Markets Index.

The decision comes after the Kingdom’s year-long efforts to improve and enhance the Saudi Stock Exchange (Tadawul) that included opening the markets to foreign investors, changing over to a T+2 settlement cycle, lowering assets under management (AUM) requirements for qualified foreign investors (QFI) and introducing shorting of trades.

“Following the introduction of these major enhancements to the accessibility of the Saudi Arabian equity market, MSCI will be consulting with international institutional investors to gather informed feedback on their practical experience of accessing the Saudi equity markets and in particular on the effectiveness of the recently implemented enhancements,” the index provider said in a statement late Tuesday.

The inclusion on the watch list is likely to boost market liquidity and generate greater interest in the Saudi market as significant passive inflows are expected for the stocks that are likely to be included in the index. The Morgan Stanley Investment Funds has a portfolio worth $1.5 trillion in assets.

“Moving to MSCI watch list is a major achievement for Saudi Arabia and a reflection of market reforms undertaken. The ultimate target is to attract greater share of international investment flows where we see a continued push by all market participants. This places KSA on foreign investors' radar and should generate increasing interest in the run-up to EM inclusion, Asim Bukhtiar, head of research at Saudi Fransi Capital told Argaam.

“From market fundamentals, we believe historical comparison is no longer relevant and KSA should be compared relative to EM peers where it commands attract margins and dividend yield,” he added.

According to NCB capital’s estimates, the Tadawul is expected to account for 2.48 percent of the MSCI Emerging Markets Index, implying inflows of $40.8 billion from the investors that use this benchmark.

Active investors would contribute $34.2 billion to these inflows, with the remaining $6.6 billion will come from Exchange Traded Funds (ETFs) investments, it said.

Abdulla Bashein, head of TeamOne Consulting said between five and ten Saudi companies are expected to be included in the MSCI index--including three or four banks--in addition to Saudi Basic Industries Corporation (SABIC), Almarai Co. and Savola Group.

Meanwhile, Tadawul said the move followed a series of market reforms that Tadawul and the Capital Market Authority (CMA) have undertaken as part of the Kingdom’s Vision 2030 economic transformation program, which “in part seeks to bring the Saudi market into alignment with its emerging and developed market peers and gain recognition for the country as an indexed emerging market.”

"Saudi Arabia's addition to the MSCI Watch List is an important milestone for Tadawul, and reflects the Kingdom's significant progress in capital market reform in support of Vision 2030," said Sarah Al Suhaimi, the chairperson of Tadawul said in a statement.

"Potential inclusion in MSCI's Emerging Market Index signals to international investors that the country's capital market has attained greater maturity in terms of efficiency, governance and regulatory framework."

Write to Brinda Darasha at brinda.d@argaamplus.com