MSCI upgrade for Saudi Arabia is credit positive for kingdom's asset managers

Saudi Arabia’s May 28 inclusion in the MSCI Emerging Market Index is expected to bring in $30 to $40 billion (Dh147bn) of investment flows to the kingdom’s equities market and will be credit positive for the asset managers in the country.

“The inclusion will deepen the liquidity and trading volume of the stocks in the index and likely attract a growing number of foreign investors, a credit positive for Saudi asset managers,” Moody’s Investors Service said.

“The inflows will make the Saudi equity market, which currently has a $700 million per-diem average traded volume, placing it among the top 10 stock exchanges in the MSCI EM Index.”

This inclusion paves the way for tens of billions of dollars of additional inflows of funds to the kingdom’s half-a-trillion-dollar stock market, the largest in the Mena region.

The phased addition of Saudi Arabia to the index gives the kingdom’s stocks a representative weighting on a pro forma basis of approximately 2.6 per cent of the index with 32 securities, MSCI said.

Saudi Stock Exchange, or Tadawul as it commonly known, has also been included in emerging market benchmark indices of global index provider FTSE and S&P Dow Jones. These indexes are widely tracked by global investors that manage trillions of dollars in investments. MSCI EM Index has funds with assets under management in excess of $1.9 trillion benchmarked to it alone.

Saudi asset managers such as NCB Capital and Jadwa Asset Management along with firms involved in cross-border capital markets products stand to benefit from the MSCI inclusion, Moody’s noted.

Broad demand will be credit positive for the asset managers as it will allow them to offer new investment products, which will add diversification benefits. Asset managers that build strategies around the Saudi market, such as Invesco, which launched its first Saudi Arabia exchange-traded fund on the London Stock Exchange in June 2018, will likely increase their assets under management. International asset owners managing passive investment strategies in the emerging market segment will also broaden their investment universe, Moody’s said.

The MSCI inclusion will facilitate investors’ accessibility to the local stock market.

“We expect more international institutional investor participation in the onshore, largely retail-driven market,” Moody’s said. “It will increase foreign-investor ownership in the Saudi equity market, which is around 5 per cent of total market capitalisation as of April 2019.”

Overall, a deeper stock market and increased foreign investment will likely improve corporate governance and free float in Saudi Arabia, boost internationalisation and bolster investor confidence, the rating agency said. Going forward, the weight of Saudi Arabia in the international indices will depend on the kingdom’s privatisation program, which includes public offerings including estimated $100bn planned share float of Saudi Aramco, it added.

Updated: June 11, 2019 04:27 PM