Saudi stock exchange cheers MSCI emerging markets upgrade

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The Saudi stock exchange celebrated an “historic milestone” with inclusion into MSCI’s Emerging Market index, as it pledged to make further improvements to become the “leading” market in the Middle East.

The move, announced early Thursday morning Riyadh time, is forecast to attract as much as $40 billion in foreign investment into Saudi stocks, following a series of reforms passed by authorities to bring the
Kingdom’s capital markets more in line with international standards.

“This is a significant milestone for the Saudi capital market,” said Saudi Arabia’s Minister of Finance Mohammed Al-Jadaan.

“The reforms of the Saudi capital market, guided by Vision 2030, and the government’s strong commitment to modernize the Saudi economy through comprehensive reforms, have aligned the market with
international best standards making it more attractive to both domestic and foreign investors. We will continue to build a law-based capital market to further strengthen investor confidence and steadily enhance
market functions to serve the Saudi economy while stimulating savings, financing and investments.”

Khalid Al-Hussan, chief executive officer of Tadawul, told a press conference in Riyadh that he was “more excited by what’s about to come as we continue to enhance the market’s future.” Plans are under way
to introduce clearing systems in preparation for equity derivatives trading.

Mohamed El-Kuwaiz, Chairman of the kingdom’s Capital Markets Authority, said that the event was the culmination of a three year process to get the Saudi market into the global emerging market index. “It is a
nationally great achievement, and a historic milestone on the journey of Saudi capital markets,” he added.

He added that the move would pave the way for initial public offerings (IPO) on the Saudi exchange, including the historic listing of Saudi Aramco, slated for next year, and other privatizations. “This is not the
end of the journey,” he said.

The meeting coincided with the opening of the Saudi market in Riyadh. Saudi shares rose by nearly 1 percent in early trading, before shedding gains to trade slightly higher in the afternoon.

“Saudi Arabia’s market performance over the next few sessions is of little relevance in our view. Some selling of the fact [of inclison] is expected,” Mohamad Al Hajj, an equities strategist at the research arm of
EFG-Hermes in Dubai, told Bloomberg.

The index compiler MSCI decided to give Saudi a weighting of 2.6 percent of the EM index, higher than the 2.3 percent it had previously indicated, meaning that more International funds could flow into Saudi
Arabia.

At that level, some 150 billion riyals ($40 billion) worth of foreign investment could end up on Tadawul, via a mix of passive and active fund managers. Tadawul officials estimated passive funds — which track
the index — account for 25 percent of that.

Sarah Al-Suhaimi, chairman of Tadawul, said that inclusion in the index was a “very important step for Tadawul and for the Kingdom.” She was proud that MSCI had upgraded Saudi Arabia after only one year
on its watchlist, which she said was the shortest period on record.

Full official inclusion into the index will take place in two stages over the next 12 months. El-Kuweiz said that the timing of the Aramco IPO was still being finalized and was not dependent on final inclusion on
MSCI.

“The IPO and the condition of the market are related, but not directly linked. Obviously the weight of the market will increase when Aramco is included, but that timing will depend on multiple factors, like the
market context, the valuation the company puts on itself, and the preparedness of the company,” he said.

“It is our job to ensure the market is ready for such events, and this is what we have done,” he added.

Some analysts argue that the health of the Saudi market depends more on the oil price, domestic economics and regional geopolitics than inclusion in MSCI.

Jason Tuvey, Middle East economist with London based consultancy Capital Economics, said: “We still expect oil prices will drop back over the next couple of years. That is likely to put fiscal austerity back on
to the agenda, and we expect that growth in the non-oil sector will slow again in 2019. Meanwhile, geopolitical tensions will linger. And we expect that global appetite for risky assets will deteriorate over the next
couple of years.”

He forecast the Tadawul index would fall around 6 percent this year, after a sharp rise in the first half.

Al-Hussan said the MSCI inclusion was a very significant factor for Tadawul. “I disagree that MSCI inclusion is less important than these other factors. It is a sign of the confidence of International investors in
the Saudi market, and a reflection of how confident they feel here.”

Saudi Arabia is already the biggest stock market in the Arabian Gulf, with a market capitalization of $520 billion, but policymakers have said they want to make it the “dominant” one too, possibly by encouraging
cross-listings of other GCC companies in Riyadh and by co-ordinating regulatory regimes across the region.

Ziyad Al-Ashaikh, Deutsche Bank’s chief country officer for Saudi Arabia, said: “This represents a major milestone. Not just for the kingdom, but for the entire Middle East and one that demands a great deal of
attention from institutional investors globally.”

22/06/2018
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