MSCI upgrades Saudi Arabia to an emerging market

Index provider MSCI has upgraded Saudi equities to emerging market status by including them in its widely tracked Emerging Markets index.

The decision could herald more than $40 billion in foreign inflows and follows an earlier upgrade from fellow index provider FTSE Russell in May.

“MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process,” said MSCI.

Saudi Arabia has implemented a series of economic reforms in the last 18 months to bring its capital markets into line with international standards and encourage more foreign investment as it looks to lower its economic dependence on oil-based revenue.

The reforms have included a move to a T+2 settlement cycle, amended foreign ownership rules and the introduction of short-selling. The inclusion of Saudi stocks in MSCI’s Emerging Markets Index, which is tracked by about $1.9 trillion in assets, will be seen as an affirmation of these reforms and the ability of the country to attract more institutional investment to its stock market. 

International investors’ interest will probably now turn to the planned initial public offering (IPO) of Saudi Aramco. Bassel Khatoun, managing director, frontier and MENA, Franklin Templeton Emerging Markets Equity, said the Aramco IPO would “trigger more privatisations across the kingdom and set the standard for local corporate governance and transparency”.

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