Saudi Stock Exchange May Join MSCI Index

Saudi Arabia might be the next to join the ranks of MSCI, an influential index provider, which could see more international investors gain access to the Middle East's largest stock market.

The president of the Saudi Capital Market Authority said yesterday that the country's stock exchange is in talks with several index providers, including MSCI, to become a component.

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"The kingdom is eligible to join emerging markets indicators like some of other markets in the region," Abdul Rahman Al-Tuwaijri was quoted as saying by Saudi's state news agency. No specific timing or details have been provided.

Samer Sohl, Managing Director of Amwal Asset Management, said “if the Capital Markets Authority [in Saudi] enters into more substantive discussions and a plan with MSCI, as Qatar and the UAE have been doing, we should expect more clarity on the degree of openness to foreign capital.”

So far six of the Gulf’s seven bourses, including the UAE and Qatar have MSCI ‘frontier status', which typically applies to economies and financial markets that are considered less developed. Saudi Arabia has considered a relationship with the MSCI, but was not added to the ranks after negotiations failed last year.

Candidates for the MSCI must meet guidelines on market integrity and access.

The inclusion of Saudi Arabia in the MSCI would be of huge benefit to investors in the region. The country boasts the largest stock market in the Gulf and money managers are eager to tap into the market to diversify their Middle Eastern exposure. At the moment, foreign institutions cannot buy shares on the Tadawul, although they can access the market through alternative investment vehicles.

Sohl said “Saudi Arabia is the region’s largest and most liquid market, slightly larger than Turkey’s in terms of market capitalization. It is more diversified than the rest of the GCC and has solid companies with much improved corporate investor relations programs than from a few years ago.”

Recently the markets in the UAE and Qatar have been on the move in anticipation of an MSCI upgrade. These markets could move from ‘frontier’ to ‘emerging markets’ status, if board approval is granted next month. MSCI is expected to revalue its assessment of these Middle Eastern markets by examining several factors including economic development, trading volumes and market accessibility.

On the potential long-term impact of this Sohl said: “the effect of any inclusion will depend on which specific index or indices the Tadawul joins. Currently, because of access restrictions and foreign ownership limits, we expect eventual funds flows to be limited. Therefore, the impact is likely to be more around a positive perception that Saudi Arabia is opening up for global investors.”

For more insight on Saudi and MSCI, as well as the potential for increased foreign direct investment in Saudi, look for my reports from Riyadh at the Euromoney Conference this week.