Saudi Arabia could see potential $10bn windfall from MSCI upgrade

Saudi Aramco Clears Another IPO Hurdle | OilPrice.com

Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom's stocks in its widely tracked Emerging Markets index. Foreigners are already net buyers of Saudi stocks, having poured in $3 billion this year through June 7, according to data from the stock exchange and 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 authorities say they plan to sell up to five percent of oil giant Aramco within the next 12 months.

MSCI will decide if Argentina can return to the "emerging" markets from its current "frontier" segment encompassing smaller and less developed stock markets. "We estimate that MSCI's decision could lead to $3 billion of inflows to Saudi Arabia from passive funds and a potential $10.6 billion of inflows from active funds".

Featuring 32 stocks and with a weighing of 2.6%, Saudi Arabia's Tadawul index is the Middle East's largest stock exchange with a market capitalization of about $500 billion.

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. Neither decision was assured, and together, they could prompt a relief rally after a selloff knocked US$2.7 trillion from emerging economies since late January amid threats of a global trade war and higher USA rates.

The kingdom, which was also recently added to the FTSE Russell as a "Secondary Emerging" market in March 2018, will be included in MSCI's Emerging Market Index in two phases concurring with the May 2019 Semi Annual Index Review and the August 2019 Quarterly Index Review.

MSCI will decide whether to reclassify Saudi Arabia and its US$ 526 billion bourse to "emerging" from "standalone" status.

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"Saudi's upgrade is likely to bolster stock prices, and provide the trigger for a wider catch-up rally by regional exchanges", said Salah Shamma, head of investment, Middle East and North Africa at Franklin Templeton Emerging Markets Equity.

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 the UAE, members of the MSCI EM index since 2014.

Over the past three years, the CMA and Tadawul have implemented several measures to open the domestic equity market to global institutional investors.

Additionally, in the announcement, Sebastien Lieblich, managing director and global head of equity solutions, said the inclusion would mean worldwide institutional investors are able and ready to access and operate in these markets.

"We won't just see ETFs, we will see more diversity in investment vehicles. Foreign investors' portfolio holdings in the Tadawul now account for a mere $9 billion, making the level of potential inflows into Saudi Arabia quite unprecedented".

VIDEO: How did Saudi stocks push Tadawul over 8,000 for 1st time since 2015?

"The IPO of Saudi Aramco could also potentially add another $50 billion of inflows into the market. Other sectors including utilities, insurance, retail and real estate account for the remainder", Merrill Lynch said.

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