Global index provider MSCI announced on Wednesday the re-classification of Saudi Arabia’s stock index from Standalone Market to Emerging Market status. The upgrade, which was widely anticipated by investors, follows a market classification review after MSCI put Saudi on a watch list for a potential upgrade last year.
The decision comes after the implementation of a number of reforms by the Saudi Arabian Capital Market Authority (CMA) which facilitate foreigners’ access to equity markets in line with the Kingdom’s Vision 2030 economic diversification strategy.
Featuring 32 stocks and with a weighing of 2.6%. Saudi Arabia’s Tadawul index is the Middle East’s largest stock exchange with a market capitalization of about $500 billion.
The total market capitalization of the MSCI Emerging Market index stands at $5.58 billion and includes China, Mexico, Brazil as well as Egypt and the UAE.
Analysts at EFG Hermes expect the upgrade to attract around $10 billion in so-called passive funds which track the index, but many expect that figure to be higher as more ‘active’ funds seek to invest in the Kingdom. According to Reuters data, around $1.7 trillion of active and passive money is benchmarked against MSCI’s EM indexes.
Industrial, financial heavyweights
The largest Saudi stocks on the MSCI index are expected to be industrial and financial heavyweights such as SABIC and Al Rajhi bank.
According to MSCI, an upgrade decision takes three main criteria into account: a country’s economic development, the size and liquidity of its stock market, and its accessibility to foreign investors. In order to be promoted, a country must meet all three criteria.
MSCI has been operating a Standalone Saudi Stock index since the Kingdom opened up its equity market to foreign direct investments in June 2015 through a Qualified Foreign Investor (QFI) program.
Since September 2016, a number of positive market reforms were implemented such as raising foreign ownership limits and reducing the number of qualifications requirements to apply for a QFI license as well as improving the registration process for foreigners.
Saudi’s Tadawul Stock Exchange also implemented a new operating model which provides new clearing and settlement mechanisms as well as the introduction of short-selling.
Due to the size of the Saudi market, MSCI will implement the reclassification in two steps, the first in May 2019 and the second in August 2019.