Saudi market in MSCI boost

The Tadawul published draft rules for the introduction of a T+2 settlement cycle earlier this month. Hasan Jamali / AP Photo

Index provider MSCI has welcomed recent stock market reforms in Saudi Arabia, which it says bring the country’s stocks closer to inclusion in its widely tracked Emerging Markets (EM) Index.

MSCI has reiterated that it may launch a review in June of whether to include Saudi stocks in the EM index, which brings with it access to billions of dollars of funds under management.

Actual inclusion in the index is unlikely to occur before mid-2019.

Saudi’s Tadawul exchange and Capital Market Authority have unveiled a series of reforms in the past 12 months to bring its stock market more in line with international best practices. These have included relaxing restrictions on foreign investors and plans for new regulations on securities lending and covered short selling.

“These reforms should make a significant contribution toward bringing the Saudi equity market closer to emerging market accessibility standards,” the index provider said in a statement.

“MSCI specifically recognises the extent and the pace of change undertaken by the Saudi Arabian authorities to open the local equity market to international institutional investors. MSCI will continue to monitor these positive developments.”

Earlier this month, the Tadawul published draft rules for the introduction of a T+2 settlement cycle. The rules, long asked for by international institutions, are set to be introduced next quarter.

“The Tadawul and CMA have worked tirelessly in improving foreign investor access to the market in particular and in developing the Saudi market to meet international standards/practices,” said Nayal Khan, the head of institutional sales trading at Saudi Fransi Capital. “An EM inclusion for Saudi Arabia in MSCI and other indices [would be] a huge positive for market in general.”

MSCI noted that there was no proposal to include Saudi stocks in its EM Index as part of its current market classification cycle. The index provider noted that such a proposal could be included as part of its upcoming cycle, starting in June. “The inclusion in the review list would be conditional on positive early feedback received from market participants on their effective experience of investing in Saudi Arabian equities,” the company said.

MSCI usually spends 11 months to make a decision, with actual inclusion coming a year later, meaning that Saudi stocks are unlikely to feature in the EM index before mid-2019.

“The removal of the existing T+0 settlement cycle is the last requirement standing between Saudi Arabia and entry into the MSCI Emerging Markets index,” said Fahd Iqbal, the head of Middle East Research at Credit Suisse in a research note yesterday.

“The MSCI announces its annual market classification review in May 2017, and should Saudi Arabia successfully implement T+2 settlement by then, we see a very high likelihood of the MSCI reviewing Saudi Arabia for inclusion in the EM index.”

Analysts forecast that Saudi stocks would account for 1.5 per cent to 2 per cent of the index’s weight upon inclusion.

The Tadawul closed about 0.1 per cent higher.

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