MSCI to study Saudi market upgrade

11 June 2015

Emerging market status could lead to influx of capital

  • The US’ MSCI to consider adding the Tadawul to its emerging markets index review list
  • It will collect feedback from international investors on the new regulations
  • Emerging market status should lead to more international investment

New York-based MSCI will consider adding the Saudi Stock Exchange (Tadawul) to its emerging markets index review list, following its opening to qualified foreign investors (QFIs) in mid-June.

MSCI will monitor the effectiveness of the opening and request feedback from international institutional investors once the regulations have been in place for some time.

It will ask participating investors about the registration process, ownership limits and other regulations, which are unusually strict.

If the Tadawul is added to the emerging markets status review list, MSCI will monitor its performance for several years before making a decision.

An upgrade to emerging market status could mean that large, experienced institutional investors who follow MSCI indexes invest more in Saudi equity. This may lead to a larger influx of capital than is expected following the QFI opening.

The move follows the launch of Saudi Arabia’s standalone index on 1 June. It covers 19 companies, or approximately 85 per cent of SR2,137bn ($570bn) market capitalisation on the Tadawul. The list is dominated by financial institutions and industrial or commodities companies.

The index has risen by 20.7 per cent since the beginning of 2015.

However, in Dubai and Qatar, indexes fell after they were upgraded to emerging market status in May 2014. Speculation before the upgrades led to overvaluation, and foreign investors were either already in the market, or reluctant to increase their portfolios.

However, a significant increase in market activity did occur in the medium term. Trading volumes increased from QR300m a day before 2014 to QR500m a day in 2015 on the Qatar Stock Exchange. On the Dubai Financial Market, volumes reachedAED1.5bn a day in 2014, compared to AED642m in 2013.

Saudi Arabia is one of the last markets to allow foreign investment. From 15 June, qualified institutional investors with at least $5bn under management will be allowed to invest directly. However, QFIs can only own 10 per cent of shares in any one company, and 20 per cent of the aggregate market value, limiting any capital inflows.

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