Aramco’s presence on MSCI emerging Markets Index to attract funds

EFG Hermes says the entire Mena region stands to benefit.

Saudi Arabia’s inclusion in MSCI’s Emerging Markets Index, together with the upcoming initial public offering of oil major Saudi Aramco, will prompt a large increase of international funds into stocks across the Mena region, according to the investment bank EFG Hermes.

The forecast comes alongside reports that Aramco has signed on additional advisers to assist with its listing, which may be as large as US$100 billion, due to happen as early as next year.

The inclusion of Aramco and other Saudi stocks in MSCI’s closely tracked EM index would attract greater attention from international fund managers to equities across the entire Mena region.

“Mena contributes around 7.3 per cent of total emerging market GDP, but accounts for only 1.8 per cent of the MSCI EM Index,” the bank said in a research note on Wednesday.

“The inclusion of Saudi Arabia in MSCI EM and the potential IPO of Aramco would bring Mena’s total MSCI EM weight to [about] 7 per cent, making Mena an important subset of emerging markets. We believe that this would mean higher active GEM [global emerging market] allocations to the region.”

Such an allocation from active GEM funds would imply an increase of between US$70 billion and $94bn in total active foreign ownership of stocks in the UAE, Qatar and Saudi Arabia, up from the current $25.4bn, the bank said.

Media reports on Tuesday said Saudi Aramco had selected JP Morgan Chase and Morgan Stanley to assist with its IPO, following the appointment of boutique investment bank Moelis this month.

The company is also reportedly in discussions with five banks, including HSBC, for a further advisory role focusing on providing a pipeline to Chinese investors. The Saudi Aramco IPO is the central pillar of Saudi Arabia’s Vision 2030 plan, designed to diversify the country’s economy away from an over-reliance on oil revenues.

EFG Hermes described the inclusion of Saudi Arabia in MSCI’s EM Index as “critical” for Aramco’s IPO, with fund managers more likely to invest in an on-benchmark stock.

MSCI said last month it may launch a review in June of whether to include Saudi stocks in the EM index, following recent stock market reforms. Actual inclusion in the index is unlikely before mid-2019. ​

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