A surge of investment into Saudi Arabian shares could follow the decision to include the Kingdom’s equities in a leading emerging-markets stock index. The inclusion will be in two steps, in May and August 2019, and we expect around $8bn in passive inflows into the country’s market.
MSCI announced the move alongside changes to its indices covering Argentina and Kuwait that could also stimulate investment inflows.
From next year, the MSCI Saudi Arabia standard index will be included in the MSCI Emerging Market standard index with a potential weight of 2.6 per cent and 32 constituent stocks. The inflows to the market could be larger than $8bn, however, if active buyers add to the passive investors whose funds must match the index composition.
And fully including Aramco when the state oil company is listed, as planned, could raise the country’s weight to 7 per cent of the index.
Another 40 small cap stocks have been included in the Saudi Arabia Investible Market Index, besides the 32 standard constituents.
Saudi Arabia is a market long ignored by foreign investors but which is increasingly coming into focus. Following three years of economic slowdown, fiscal policy is now more expansionary and budgeted capital expenditure is projected to increase by 14 per cent. This should be complemented by additional investment spending from the Public Investment Fund and the National Development Fund.
Further subsidy reform should bring fuel prices closer to international averages, but long-term economic visibility is still lacking. The central issue lies in whether Saudi Arabia can diversify away from oil, as envisaged in its Vision 2030 programme. If it succeeds, the current fiscal imbalance will not be a concern - but if not, further fiscal consolidation will likely be required.
Meanwhile, the MSCI Kuwait Index will be considered next June for reclassification from Frontier Markets to Emerging Markets status. If successful, the reclassification would take place in May 2020.
Indications are that 13 of the 17 current constituents of the MSCI Kuwait Investible Market Index would meet the emerging-markets requirements, with six joining the standard index. That would give the MSCI Kuwait Index a weighting of 0.3 per cent in the MSCI Emerging Markets Index, implying potential passive inflows of about $1.2bn.
Additionally, the MSCI Argentina Index will be included in the MSCI Emerging Markets Index from May 2019, upgrading that country too from Frontier Markets status to Emerging Markets.
It will continue to include only foreign listings of Argentinian companies, however, such as American Depositary Receipts, because international institutional investors say the domestic market needs greater liquidity before a shift from offshore to onshore listings can be considered.
Liquidity conditions on the Buenos Aires Stock Exchange will be monitored by MSCI and the decision re-evaluated. But the reclassification decision will be reviewed if the Argentinian authorities introduce market-accessibility restrictions, such as capital or foreign-exchange controls.
The index is likely to have 11 constituents, as of now, with a potential weight of 0.5 per cent in the emerging-markets index. This should result in passive inflows of $2bn.
The IMF has agreed a substantial standby agreement for Argentina, but there are concerns about the speed and efficacy of economic reforms and over economic management.
Disclosure and disclaimerMore, collapsed
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: John Lomax
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