Saudi Arabia’s Capital Market is on the Go!

The index maker MSCI announced on Thursday 21st June the inclusion of Saudi stocks in its benchmark, the MSCI Emerging Markets, by June 2019. Saudi stocks will account for around 2.6% of global capitalisation.

The inclusion of Saudi Arabia in the MSCI Equity index would also be closely watched by bond market players.

Saudi equities entering the Emerging Markets benchmark is a strong signal of confidence for investors. For several months, Riyadh has made the necessary efforts to improve the regulation and especially the conditions of access for foreign investors to their stock markets.

The decision was eagerly awaited by local authorities, given the weight of the index among investors. The MSCI EM index serves as a benchmark for funds claiming more than $ 1.5 trillion in assets under management (20% of which are passive funds). Entering the index is therefore the insurance to get into the radars of the largest investment funds in the world.

The inclusion of Saudi Arabia is anything but a surprise, as the country has already incorporated a few weeks ago the emerging index created by FTSE Russell. For Riyadh this step is all the more important and symbolic seeing how the neighboring markets of Qatar and the United Arab Emirates had already joined the MSCI EM in 2014, while the largest stock market in the region (490 billion dollars of capitalization) remained at the doorstep.

Saudi stocks will weigh about 2.6% of the MSCI EM index. This will be done in two stages, in May 2019, then in August. With the upcoming IPO of Aramco, Saudi Arabia’s global financial weight could indeed increase in the future.

For now foreign investors hold only 1.8% of the Tadawul index, against 14% for UAE shares and more than 9% for Qatar. With the decision of MSCI, the country could attract $ 40 billion of additional flows according to Bassel Khatoun, CIO at Franklin Templeton Investment.

The Saudi Arabian Capital Market Authority (CMA) and the Saudi Stock Exchange (Tadawul) have been demonstrating an extraordinary commitment in the past couple of years to privatization and opening up their markets to foreign investors.
CMA and Tadawul have implemented several enhancements that have increased the opening of the domestic equity market to international institutional investors. Following the introduction by the CMA in 2015 of regulations for approved foreign financial institutions, the methods of access to the stock market have moved from indirect participations via derivative instruments, such as P-notes and / or SWAPs, to direct participations. Tadawul completed a complete redesign of its business model, including the introduction of a 2-day settlement and a cash-based delivery in April 2017.

Another breaking news to look out for… MSCI has also announced that it will include the MSCI Kuwait Index in its annual review of the 2019 market classification with a view to a potential reclassification of its status from a Frontier Market to an Emerging Market.

This goes to say, patience is key… vision 2030 seems to have stirred up curiosity across the globe and concrete steps on all sides are being taken. Let’s wait and see what investors will have to say…