Saudi index win is stepping stone not step change

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Saudi Arabia added to the MSCI EM index

Neither decision was assured, and together, they could prompt a relief rally after a selloff knocked US$2.7 trillion from emerging economies since late January amid threats of a global trade war and higher USA rates.

Featuring 32 stocks, Saudi would be the third-largest constituent country from the Europe, Middle East and Africa region, behind South Africa and Russian Federation.

Abhishek Kumar, sector head of emerging markets debt, fixed income beta at SSGA, said the "developments in equity world (are) likely to be closely watched by the fixed income index providers".

On the major upgrade, Mohammed El-Kuwaiz, the chairman of the CMA, said: "This decision shall enhance the diversity of the investors' base as well as the liquidity of the Saudi Capital Market".

He said passive investors tracking the MSCI index will only get access to the Saudi market next year, although active investors can participate in IPOs now.

"We expect about 20 percent of the actual free float in Saudi Arabia may be bought by foreigners over the inclusion period", he said, adding the free float of the market is around $200 billion.

MSCI added China shares to its emerging markets benchmark this month but inflows have so far fallen short of expectations.

Only offshore listings of Argentine companies will be included, such as American Depositary Receipts.

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The MSCI Saudi Arabia Index will have a weighting of approximately 2.6 percent in the emerging markets index, with 32 securities, following a two-step inclusion process in May and August next year.

Foreigners were net buyers of Saudi stocks in nearly every week this year, with net inflows of about $3 billion as of June 7 on aggregate for 2018, according to data compiled by Bloomberg. The amount of cumulative net sales came to 3.36 trillion won (US$3 billion) this year alone, more than the 3.13 trillion won (US$2.8 billion) of shares they net purchased last year.

Franklin Templeton funds have recently become Qualified Foreign Investors (QFI) in Saudi Arabia.

"The IPO and the condition of the market are related, but not directly linked". Since then, it eased requirements for these investors with measures such as lowering the minimum amount of assets under management to get the status of qualified foreign investors, or QFI, and aligned trade settlement times with global standards.

The overall MSCI emerging Markets index.MSCIEF is down 5.6 percent year to date.

"It is the culmination of Tadawul's ongoing efforts to work closely with Saudi regulatory authorities and leading emerging market investors to implement far-ranging reforms and market enhancements in bid to boost the effectiveness of the Saudi capital market and foster an attractive investment climate for local and worldwide investors", observed Al Suhaimi. This stands in stark contrast to capital inflow to equity funds in advanced countries. The recent selloff in stocks and an "attractive" exchange rate means that Argentine stocks offer "interesting opportunities" for foreign investors, according to BlackRock Inc. "Combatting populism is a hard task".

Saudi Arabia is already the biggest stock market in the Arabian Gulf, with a market capitalization of $520 billion, but policymakers have said they want to make it the "dominant" one too, possibly by encouraging cross-listings of other GCC companies in Riyadh and by co-ordinating regulatory regimes across the region. Mark Mobius, who has gained a reputation for being optimistic more often than not on emerging markets prospects, said earlier this month he isn't completely bullish on Saudi Arabia because the range of offerings is limited and a number of restrictions are still in place.

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