Emerging markets grow by US$600b with Saudis, Argentina

Sean Reid
June 23, 2018

Saudi Arabia has cleared another hurdle on its way to successfully launching Aramco's initial public offering after MSCI granted it emerging market status in its latest review, Morningstar reports.

Watch Video: Will Aramco only list its IPO on Tadawul? Saudi Arabia hopes to sell 5 percent of the world's largest oil exporter, valuing the company at more than $2 trillion.

The Invesco MSCI Saudi Arabia Ucits ETF, will offer investors pure passive exposure to the largest economy in the Middle East. The potential for the MSCI upgrade has made the market in Riyadh a magnet for foreign investors, making it the world's second-best performer this year.

Saudi is the third GCC country to be granted MSCI emerging market status - the UAE and Qatar were included into the index in 2014. "This will create a much deeper and more liquid market", he said.

Saudi Arabia has emerged as another factor that could fuel foreign investors' capital outflow from the South Korean stock market.

The inclusion, coupled with the International Monetary Fund deal, is expected to lead to capital inflows into the country, helping to ease pressure over the central bank to stabilize the currency, Jim Barrineau, head of emerging-market debt at Schroders in NY, wrote in a note.

MSCI provides almost 100,000 daily indexes of stocks, bonds and other assets worldwide.

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

Anita Yadav, head of fixed income research at Emirates NBD, told Khaleej Times that the inclusion of Saudi equities into the MSCI EM index could trigger passive inflows of $10 billion.

The index provider did add a caveat, saying that it would reconsider the Argentine decision should authorities introduce "any sort" of restrictions on market accessibility. "The part privatisation of Aramco is vital for boosting the government's forex reserves and GDP growth outlook through higher investment".

"Saudi Arabia is a reform story on many levels".

The remaining $11 billion in actively managed capital could enter Saudi market even without a MSCI inclusion, provided the prospectus of those funds allow it. "From this year, stronger USA dollar and rising United States rates could continue to attract buyers, especially for Saudi banks", he said.

"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 worldwide best standards making it more attractive to both domestic and foreign investors".

However, some investors have been less enthused about the opportunity presented by Saudi's inclusion as a result of the limitations on foreign capital that are in place in the country.

Franklin Templeton funds have recently become Qualified Foreign Investors (QFI) in Saudi Arabia. The fact that Saudi Arabia may be coming in to the EM index obviously means that it broadens the index and gives fund managers a bit more choice.

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