Saudi stocks will have potential 2.3 per cent weighting on MSCI Emerging Markets Index

Saudi stocks will account for a potential 2.3 per cent weighting in MSCI's Emerging Market Index in the event of an expected upgrade of the kingdom's equities to the widely tracked measure, the index provider said in a presentation.

The 2.3 per cent weighting would make it the third biggest market in the EMEA region on the index behind South Africa with 6.7 per cent and Russia with 3.4 per cent.  The kingdom's weighting will increase following the completion of the initial public offering of Saudi Aramco, currently slated for late 2018, the index provider said.

MSCI last June added Saudi stocks to a watch-list for possible inclusion in its Emerging Market index, after the country passed a series of market reforms. These included easing requirements for the ownership of equities by foreign investors, reducing settlement cycles and introducing short-selling.

Inclusion in the index, which is widely tracked by international institutions, is likely to attract around $30 billion of inflows, Bank of America Merrill Lynch said in a report last week, attracting passive money flows from those looking to invest in emerging markets.

“From an economic perspective the inclusion of Saudi Arabia in the MSCI Emerging Market index will be critical for boosting liquidity, and one would expect a large increase of inflows into stocks,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“A lot of Saudi Arabia’s development plans stem from the sale of up to 5 per cent of Saudi Aramco to boost government revenues and support the country’s investment programme.”

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MSCI said reclassification of Saudi stocks would occur in two steps, coinciding with semi‐annual and quarterly index reviews in May and August 2019 respectively. The index provider confirmed it will make a decision on any upgrade this June.

The kingdom would have 32 constituents under emerging markets classification with a free-float adjusted market capitalisation of $124.1bn, alongside 42 small cap constituents with a market cap of $16.7bn, said MSCI.

In addition to MSCI, Saudi stocks are widely expected to be upgraded to emerging market status by rival index provider FTSE in March.

Saudi stocks have performed brightly so far this year on the expectation of such upgrades. Tadawul, which gained just 0.2 per cent last year, is up by more than 4 per cent so far in 2018.