Two weeks ago I published a no brainer trade. Buying Saudi in anticipation of its inclusion into MSCI. It was announced today. Expect significant re-rating.
MSCI adds Saudi Arabia, in line with consensus, acknowledging impressive reforms; Kuwait is next in line
MSCI announced the inclusion of Saudi Arabia in the MSCI Emerging Markets Index effective June 2019, representing a weight of approximately 2.6% of the index with 32 securities. This will follow a two‐step inclusion process, the first of which will coincide with the May 2019 Semi‐Annual Index Review, while the second will be in August 2019 Quarterly Index Review. MSCI also announced the reclassification of the MSCI Argentina Index from Frontier Markets to Emerging Markets status. In addition, MSCI announced that it will include the MSCI Kuwait Index in its 2019 Annual Market Classification Review for a potential reclassification from Frontier Markets to Emerging Markets status.
This marks a strong acknowledgement of the reforms undertaken by the Saudi government, which included lower restrictions on international investors and the introduction of short-selling and T+2 settlement cycles. The decision was anticipated since the beginning of the year as MSCI praised Saudi’s efforts to introduce capital market reforms that aimed at opening the local equity market to international institutional investors. We recall that index provider FTSE Russell upgraded Saudi to Emerging Market status in March 2018.
Saudi officials expects USD40bn in inflows
The CEO of Saudi bourse expects minimum foreign inflows of USD10bn from passive funds with up to USD40bn over the next year from the inclusion, and he added during an interview with Bloomberg, that Tadawul is aiming to increase the foreign participation in the market from a current 5% to 20-25% in the next two years. We do not only see the inclusion as increasing foreign presence in the market and improving liquidity, but also as enhancing the quality of the flow entering the market, which we believe will be more geared towards long-term institutional investors that will provide a fundamental growth in the Saudi market. This will be magnified by the impressive reform story the country is providing amidst EMs. Aramco IPO will be another key trigger for the market, with a potential USD50bn of assets into the market. Saudi is the third GCC country to be granted MSCI Emerging Market status, as UAE (0.4%, upon inclusion) and Qatar (0.45%) were included in 2013. According to market reports, UAE and Qatar weights are currently much higher than when they were included in 2013.