HSBC says foreign investors ready for MSCI's 'inevitable' Saudi upgrade

HSBC has estimated that an upgrade could prompt inflows of $9bn from passive investors like index funds
HSBC says foreign investors ready for MSCI's 'inevitable' Saudi upgrade
HSBC Holdings, which has the biggest investment bank in Saudi Arabia, says foreign investors are getting ready for their first significant stock purchases in the kingdom as an upgrade to emerging-market status looks likely.
By Bloomberg
Tue 24 Oct 2017 08:41 AM

HSBC Holdings, which has the biggest investment bank in Saudi Arabia, says foreign investors are getting ready for their first significant stock purchases in the kingdom as an upgrade to emerging-market status looks likely.

It’s “inevitable” that MSCI, whose classifications can influence billions of dollars of asset allocations, will add Saudi Arabia to its emerging-market benchmarks, Majed Najm, CEO of the British lender’s Saudi unit, said in an interview.

In June, MSCI put Saudi Arabia, which currently stands alone from broader groupings, on the watchlist for a potential upgrade in 2018. Another index provider, FTSE Russell, last month said the kingdom would soon meet the criteria to be promoted from its current unclassified status to a secondary emerging market, but refrained from doing so for now.

“There’s been a spate of registrations after the MSCI announcement” as firms seek Saudi approval as qualified foreign investors, said Rajiv Shukla, head of global banking and markets for HSBC Saudi Arabia, said in the same interview. “People are registering and getting ready, and when the next announcement comes about FTSE or MSCI we expect the active investors to start positioning.”

HSBC has estimated that an upgrade could prompt inflows of $9 billion from passive investors like index funds. That would be a win for a Saudi bourse that has had little to show after two years of regulatory efforts to attract foreigners, seeking the stability of more institutional money for an exchange driven by local individuals’ trading. Total foreign ownership is below 5 percent, according to data on the Tadawul exchange’s website.

Settlement Standard

The market is “on the path of fulfilling all the requirements” for an upgrade, Najm said. Among its efforts to satisfy MSCI, Saudi Arabia moved from same-day settlement to a T+2 settlement cycle, the international standard where ownership of stock is transferred two days after the transaction date.

HSBC, the top adviser for initial public offerings in the kingdom according to data compiled by Bloomberg, says it executed the first trades by foreign investors in May 2015 and the first under the new settlement rules, introduced in April.

Najm said that when local food maker Savola sold a 2 percent stake in dairy company Almarai in the kingdom’s first accelerated book-build, foreign investors were among the largest buyers. The deal “demonstrated that a lot of international investors are ready and waiting to come into the Saudi market,” he said.

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