Until recently, Saudi Arabia tantalized investors with a plan to float its mammoth oil and gas company's initial public offering on an international exchange — then left them deflated after it shelved the idea.
For now, Saudi Aramco will only be listed on the Tadawul, the country's domestic exchange. However, global investors have taken heart from a little noticed change from the FTSE global equity index series, a major market benchmark that in March classified Saudi Arabia's stock exchange as a "secondary emerging" market.
The FTSE's move — which officially makes Saudi Arabia's domestic market a benchmark available to global investors — coincided with an international charm offensive launched by the kingdom's powerful crown prince, Mohammed bin Salman. It also marked a significant milestone on the prince's quest to diversify Saudi Arabia's oil-reliant economy and gives investors a backdoor to park cash in the country.
"The FTSE inclusion means that Saudi has technically met the standards required for [emerging market] investors from a trading and operational perspective," said Asha Mehta, portfolio manager and head of emerging and frontier market strategy with Acadian Asset Management.
"This is a major development, given that Saudi's equity market was closed to foreign investors just a few years ago," Mehta said, adding that "the country's weight could be sizable —potentially as large as Mexico or Russia."
Ahead of the Aramco floatation, the inclusion of Saudi Arabia in emerging market indexes was a development eagerly awaited by market watchers.
Given historical limits to accessing the market, the country has not been included in major benchmarks prior to the FTSE classification, so the move could represent a watershed for both Saudi Arabia and investors hungry for yield.
"The FTSE upgrade is important and a key reflection of the improvements in the financial plumbing that Saudi Arabia has made in recent years, but the next step to attracting equity inflows is to prove the macro story and issuance," said Rachel Ziemba, an emerging market analyst and adjunct fellow at the Center for New American Security.
"Reducing restrictions to purchase is important, but so is the macro story: growth, liquidity, and future profits, as are the flows," she added.