Published: Sat, June 23, 2018
Business | By Eloise Houston

Saudi regulator expects $40 billion foreign fund inflows after MSCI

Saudi regulator expects $40 billion foreign fund inflows after MSCI

Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom's stocks in its widely tracked Emerging Markets index.

MSCI has announced that it will evaluate the potential reclassification of Kuwait from frontier markets to emerging markets status in its 2019 annual review.

The benchmark KOSPI index closed at 2,340.11 on the 19th, down 36.13 points, or 1.52 percent, as most of the large-cap stocks except Samsung Electronics Co. and SK Hynix Inc. showed a steep decline.

In March, MSCI's rival index compiler FTSE Russell also chose to upgrade Saudi Arabia to emerging market status after the kingdom.

Inclusion "is a game-changer for Saudi Arabia's capital markets", said Antoine Maurel, head of global markets for Middle East, North Africa and Turkey at HSBC Bank Middle East Ltd., who estimates it will lead to $35 billion of inflows.

Saudi Arabia and Argentina were upgraded to emerging market status, officially joining the emerging markets ranks in May 2019, according to a company statement. While the inclusion could increase the pace of reform in the Saudi markets like increased foreign ownership levels and transparency. "It is a nationally great achievement, and a historic milestone on the journey of Saudi capital markets", he added. Foreigners were net buyers of Saudi stocks in nearly every week this year, with net inflows of about 11.4 billion riyals ($3 billion) as of June 7 on aggregate for 2018, according to data compiled by Bloomberg.

Tadawul's CEO Khalid al-Hussan confirmed to Reuters that the stock exchange will work with stakeholders to ensure that the "substantial inflows of capital" will not adversely affect the market.

"The news on Saudi and Argentina will boost inflows to those markets short-term, but the outlook for EM assets will depend more fundamentally on global conditions - notably the United States dollar, U.S. yields and the risk of an escalating trade war", said Geoff Dennis, head of global emerging-market strategy at UBS in Boston.

Rosenbluth said he expects investors to add exposure to the iShares MSCI Saudi Arabia ETF (KSA.P) and Global X MSCI Argentina ETF (ARGT.P) ahead of the implementation of the changes. We are carefully evaluating opportunities for deepening our Shariah business in particular, which grew 32% in 2017 and manages over $2 billion in assets.

Saudi authorities say they plan to sell up to five percent of oil giant Aramco within the next 12 months.

That includes selling shares in government-owned Saudi Aramco, which is expected to stage an IPO in Riyadh that could be the world's biggest.

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

Saudi market will probably face hurdles in retaining foreign money unless companies become more transparent, some investors said.

"With $1.9trn of funds tracking MSCI's EM index, the 2.6% that Saudi will initially command is likely to result in equity flows of approximately $40bn", Khatoun said.

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