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Inclusion in MSCI index is a ‘big milestone’ for Saudi market, stock exchange boss says

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Key Points
  • The Saudi equity market will now represent 2.6 percent of the MSCI index, which in total is worth $1.9 billion, meaning the Saudi market's weight will be around $45 billion.
  • The Islamic kingdom's inclusion in the emerging markets index isn't associated with the Aramco listing, Tadawul CEO Khalid Al Hussan said.

Saudi Arabia's official inclusion on the MSCI emerging markets index is a reflection of strong investor confidence in the country's economy, the chief executive of the Saudi stock exchange said Thursday.

"This is a very important milestone because it just gives us the recognition by international investors," Khalid Al Hussan, who heads the exchange — also known as Tadawul — told CNBC's Hadley Gamble in Riyadh.

The announcement, made Wednesday, caps off a speedy 12-month exchange joining process that normally takes three to four years, the CEO said. This represented a first for the MSCI, and is expected to bolster Saudi equities.

The Saudi equity market will now represent 2.6 percent of the MSCI index, which in total is worth $1.9 billion, meaning the Saudi market's weight will be around $45 billion.

"That pool has both active and passive investors, we anticipate the passive investors to be around 25 to 30 percent, so guaranteed inflows of cash we forecast to be around $10 billion," Al Hussan said.

"This is the size of the Saudi market represented in emerging markets, guaranteed inflow of passive funds of $10 billion, and we'll work very hard with the active investors to attract the remaining investments."

Questions and concerns have been raised over governance and stability for investors in the kingdom ever since the Crown Prince Mohammad Bin Salman detained a number of wealthy nationals in the Ritz Carlton in Riyadh in November 2017. Those held were forced to hand over billions of dollars in what the government called an anti-corruption purge.

But Mohammed El-Kuwaiz, the chairman of Saudi Arabia's Capital Markets Authority (CMA), did not consider this ultimately detrimental to the country's investment attractiveness.

"Capital markets are a real-time barometer of how the investor community, local and international, views the attractiveness of investing in a country," he told CNBC on Thursday.

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"And with respect to the incidents late last year, we did see a slight decline, but by December, we were back at the same levels in terms of foreign investor participation. So we took this as the ultimate barometer of how the global investment community feels."

Foreign investment in Saudi Arabia has grown in 2018, thanks to stronger oil prices, early economic reform and liberalization efforts and the country joining the FTSE global equity index series in March.

The MSCI inclusion comes as investors await the listing of Saudi's state-owned oil giant Aramco, which would likely become the largest publicly-traded company in the world. But the Islamic kingdom's inclusion in the emerging markets index isn't associated with the Aramco listing, Al Hussan said.

"The inclusion itself isn't that related to a particular listing. However, Aramco helped attract extra eyes by investors to the Saudi market, the reforms have attracted the rest of investors, and it will add a lot of the capacity of the Saudi capital markets," he said.

Tadawul joined the FTSE earlier this year and hopes to be included in the S&P by the end of this year.

"All of these will add capacity, and of course we'd hope our efforts to increase the IPOs, including the Aramco IPO," Al Hussan said, adding that Aramco's valuation — which has been surrounded by much speculation — will depend on the information released by financial advisors.

The news comes amid a sweeping reform drive by the Saudi government to overhaul its economy, diversify away from petroleum revenue dependency and create private sector jobs for a burgeoning youth population.