Investors expect FTSE Russell to include Saudi Arabia in the emerging markets category later this week, a decision that would trigger billions of dollars in inflows to the biggest Middle Eastern stock market.
An announcement from the index compiler is due on March 28, the first of two decisions that will potentially put the kingdom on the radar of fund managers, investors say.
MSCI will provide the second in June, with a positive outcome setting the stage for a planned initial public offering of shares in Saudi Aramco, expected to be the biggest ever and key to a series of reforms taking place in Saudi Arabia. The country’s main stock gauge is up 8.7 percent this year, versus 1.8 percent for emerging markets.
Inclusion by FTSE Russell could draw about $5 billion from passive investors starting next year, with twice that amount coming if MSCI follows suit, according to estimates by EFG-Hermes Holding. The announcement is expected after markets close in the U.S., and investors in the region estimate it will be positive for the Saudis.
Index inclusion “would represent a strong signal to investors that the country has made tangible progress towards opening up its capital markets and improving its levels of corporate governance and transparency,” said Bassel Khatoun, managing director for Frontier and Middle East, North Africa at Franklin Templeton Emerging Markets Equity.
Capital Markets Authority (CMA) and the Tadawul stock exchange “have made substantial modifications to the equity-market infrastructure and accessibility since September,” when FTSE Russell refrained from adding Saudi to the category Positive decision seen from MSCI, “to be determined by how well the QFI framework and operating models are functioning.
Investor feedback, so far, has been positive” The Saudi government has announced privatization plans to increase the number of listed companies to more than 250 (from 170) by 2022. “With about $1.6 trillion in active and passively managed money tracking it, MSCI’s EM Index is a key dictator of equity flows”
“Given the current market capitalization of the Saudi index at around $490 billion, this would be a significant catalyst for unlocking some of the pent-up performance,” said Salman Bajwa, chief executive officer of Dubai-based Emirates NBD Asset Management Ltd.
Upgrade will be consistent with the government’s goal to diversify the country’s investor base, and will ensure a greater pool of capital to flow into all the proposed IPOs the government is planning.
While the Saudi Aramco IPO is independent of the upgrade, without it investors “would need to take an off index bet to participate, thereby reducing the potential demand” Index inclusion would ensure consistency with international markets in terms of disclosure requirements, settlement duration, safe custody of assets.
The market is not yet positioned for a positive decision, as it “continues to be weighed down by geopolitical risks, in spite of recovering oil prices,” said Charles-Henry Monchau, managing director at Al Mal Capital in Dubai.
“From our conversations with the index providers, Saudi meets all requirements in theory. What remains is the ‘enough time’ for trackers to test the settlement system”
The decision would put “the market on the map for active institutional managers worldwide.” Even without Aramco, “Saudi would not be a market to be ignored” Favors Saudi Arabian banks, motor insurance and “selective stories”
A positive decision “is important at this point because there has been a lot of unease from global investors around the implementation of Saudi Arabia’s economic transformation,“ said Nadi Bargouti, head of asset management at Emirates Investment Bank PJSC.
A classification will help attract “foreign, strategic investors into the market, which will give capital markets depth and improve their liquidity” Measures taken by regulators in the past 12 to 14 months - including easing rules for qualified foreign institutional investors - “improve the changes of a positive outcome from MSCI”.
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