Tadawul’s MSCI inclusion will 'deepen' regional equity markets

The Saudi Stock Exchange’s (Tadawul) inclusion in MSCI emerging markets index will renew foreign investor interest in the Kingdom and across the Middle East, analysts told Argaam.

Global index provider MSCI Inc. will add 30 Saudi Arabian securities, representing an aggregate weight of 1.42 percent, in the MSCI EM index as of the close today.

Read: These are the 30 Saudi stocks joining MSCI today

“Saudi Arabia’s MSCI emerging markets status is a huge win for its capital markets. With roughly $2 trillion in active and passive money tracking it, the MSCI Emerging Markets Index is a magnet for large equity market flows,” said Salah Shamma, Head of Investment, MENA, Franklin Templeton Emerging Markets Equity.

“Our estimates suggest that Saudi will initially account for around 2.7 percent of the index, representing around $40 billion in new flows. We expect that approximately $6.5 billion to initially come into the market with this first phase of its inclusion into the index,” he added.

Shamma believes the Kingdom’s representation in the MSCI EM index might almost double if the Saudi Aramco’s IPO goes ahead in 2021 as previously suggested.

“Saudi Arabia’s emerging markets status is just the start of the journey in terms of deepening its equity market, with substantial prospects for more growth and foreign investment driven by the government’s push to liberalize its economy further and promote the private sector, he added.

The success of both Saudi Aramco and the government’s recent international bond issues highlight the ability of the Kingdom to attract capital, and its official inclusion in MSCI is the next transformative liquidity event, according to the Franklin Templeton analyst.

“We continue to like sectors that are exposed to the Kingdom’s exciting recovery story, which includes banks and companies within the consumer-discretionary industry, Shamma said.

Josette Rizk, sales director of Invesco’s Middle East Institutional team, said the inclusion of Saudi Arabia in MSCI’s emerging markets index is a significant development for the Kingdom that will further drive foreign investor sentiment.

“We have observed a strong demand for ETFs in the GCC region and particularly in Saudi Arabia as the Kingdom has taken several steps to improve market access for foreign investors effectively. The primary driver behind the growth of ETFs in the country has been the Saudi Arabia’s inclusion in the MSCI EM index and the strong economic reforms implemented by the Saudi government as part of its 2030 economic vision,” she added.

Saudi Arabia’s inclusion is likely to renew investor interest not just in the Kingdom but across the Middle East, as more investors realize the potential benefits of ETFs to access the region, Rizk stated.

Abdulwahhab Abed, Head of Regional Business Development and Marketing and Communication, SEDCO Capital, expects the contribution of institutional players to the daily trading activity will witness a noticeable increase following the MSCI inclusion.

“Improvement in price discovery process and better valuation in fundamentally sound small and mid-cap would lead to higher number of IPOs, as capital raising through equities becomes the most efficient capital-pricing avenue. In aggregate, this move will benefit the Saudi listed equities in a significant manner,” he noted.

SEDCO Capital estimates passive investments worth $18 billion from March 2019 to March 2020. 

“In terms of active investors, we believe they might join the markets later this year with net inflows of $10 to $15 billion at least, to begin with,” Abed concluded.

Write to Parag Deulgaonkar at parag.d@argaamplus.com and

Sunil Kumar Singh at sunil.kumar@argaamplus.com