Saudi Arabia set to join emerging market index

Dubai - Classification a key step toward kingdom's goal of attracting billions in additional stock investor inflows

Leading index compiler FTSE Russell announced on Thursday that the Saudi Arabian stock market would join its emerging market index starting in March 2019.
The largest Arab economy's classification as an emerging market is a key step toward the kingdom's goal of attracting billions in additional stock investor inflows.
FTSE Russell also announced that Kuwait's stock market would enter its emerging market index in two equal stages in September and December this year, and 10 Kuwaiti stocks currently look likely to join the benchmark.
Saudi Arabia joins a category that already includes China, Russia and India. The kingdom will have a 2.7 per cent weighting in the compiler's main emerging market stock benchmark, FTSE said.
"Saudi Arabia is to be congratulated on the pace of the recent market reforms," said Mark Makepeace, FTSE Russell's chief executive officer.
FTSE's decision is one of two watershed index announcements the kingdom's regulators - and the markets - are awaiting. MSCI Inc is expected to announce its decision in June. Many equity funds around the world benchmark themselves against the index, and they will need to buy Saudi stocks when the change takes effect. With a capitalisation of about $500 billion, Saudi Arabia is the Arab world's largest equity market.
The decision is a boost to reforms launched by Crown Prince Mohammed bin Salman, who wants foreign investment to create jobs and diversify the economy, which has been hit hard by low oil prices, beyond energy exports.
"Saudi Arabia's inclusion in the FTSE benchmark is the largest event in the emerging markets since 2001, and an important development for global investors," Makepeace said.
To prevent Saudi Arabia's large size from destabilising other markets as funds shift money to Riyadh, the kingdom will enter the index in several stages starting in March 2019 and ending in December 2019, FTSE said.
The kingdom is projected to have a weight of 2.7 per cent in the index, which could rise to about 4.6 per cent because of the government's proposed public offer of five per cent of the shares of state oil giant Saudi Aramco.
Saudi authorities worked for years to meet criteria to enter the index, tightening rules on corporate governance, modernising the market's settlement system and easing - though not completely removing - restrictions on foreign ownership of stocks.
"This development will further diversify the investor base of the Saudi market, and a more diverse investor base often leads to a more mature and less volatile capital market," Mohammed ElKuwaiz, the chairman of the Saudi Capital Market Authority, said at the New York event.
The FTSE decision would likely add almost $5.5 billion of cash from "passive", index-linked funds to the Saudi market, according to Makepeace.
Regional investment bank EFG Hermes has estimated Saudi Arabia will attract about $5 billion of "passive", index-linked funds because of FTSE's decision.
In addition, rival index firm MSCI will decide in June whether to include Saudi Arabia in its own emerging market benchmark. A positive decision, which many fund managers expect, could produce around $10 billion of passive inflows.
Markets analysts said Saudi Arabia could see a total of $30 billion to $45 billion of inflows in the next two years if it reaches the foreign ownership levels of markets in the UAE. Reaching the levels of Mexico and Russia would mean $90 billion of inflows, according to EFG Hermes.
"Saudi inclusion is a milestone event in the development of the region's equity capital markets," said Salah Shamma, head of regional equity investment at Franklin Templeton Investments. "It opens up the region to a dedicated investment pool otherwise unavailable."
Shamma added that the Saudi banking, insurance, healthcare, education and consumer staples sectors were potentially attractive.
Reforms may create new investment opportunities. By increasing the presence of foreign portfolio investors in Saudi Arabia, entry into the FTSE and MSCI indexes may facilitate authorities' plan to list shares in Aramco and reinvest the proceeds in new industries. The government aims to sell about five per cent of Aramco as soon as this year, listing it in Riyadh and possibly one or more foreign markets in what would probably be the world's biggest IPO.
Prince Mohammed has predicted the sale will raise at least $100 billion. Many private analysts consider that too optimistic, but Riyadh's market is still likely to need the participation of foreign investors to help absorb the huge IPO.
At present, foreign investors of all types own less five per cent of Saudi Arabia's market. Expectations for this ratio to rise have lifted the Saudi stock index over nine per cent this year. Exchange data show foreigners have already begun buying more stocks, purchasing a net $1.64 billion year-to-date.
FTSE said Kuwaiti stocks entering the index will be given 50 per cent of their weightings in September and the remaining 50 per cent in December. FTSE projected that Kuwait would have a total 0.4 per cent weighting in the index.
It published an indicative list of the 10 stocks that would join the index based on data at the end of the last year, ranging from National Bank of Kuwait to small caps such as Alimtiaz Investment Group. It will publish a confirmed list of stocks on August 24.
With inputs from agencies
- issacjohn@khaleejtimes.com

• Saudi Arabia