MSCI move lifts Saudi exchange ahead of Aramco IPO

MSCI move lifts Saudi exchange ahead of Aramco IPO

"Fixed income index providers have not yet made any announcement about index inclusion of Saudi Arabia's domestic currency debt in the mainstream bond indices", he said. "We believe such factors could be supportive of higher mid-cycle valuations", they said.

The nation was added to a watch list for a potential upgrade past year, and will now join nations including China, India, Turkey, South Africa and Brazil.

He said passive investors tracking the MSCI index will only get access to the Saudi market next year, although active investors can participate in IPOs now. "It's only a short-term lift to the asset class overall".

What Happened: Index provider MSCI said it will reclassify Argentina as an emerging market economy, adding it back to its Emerging Market (EM) index, and will begin classifying Saudi Arabia as an emerging market, Reuters reported June 20.

Over the past three years, the CMA and Tadawul have implemented several measures to open the domestic equity market to global institutional investors. If the country imposes any restrictions such as capital or FX controls then MSCI will review its reclassification decision.

The regulation has since been changed twice by the CMA, based on feedback from global institutional investors.

MSCI said 32 major Saudi stocks will gain emerging market status, giving the country a weight of approximately 2.6 per cent in its index. Foreigners are already net buyers of Saudi stocks, having poured in $3 billion this year through June 7, according to data from the stock exchange and compiled by Bloomberg. "For Saudi Arabia and the region, this is a great opportunity to move into the limelight of worldwide foreign investors, and to attract inflows", stock market pundits said.

Watch Video: Will Aramco only list its IPO on Tadawul?

"The IPO and the condition of the market are related, but not directly linked".

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Inclusion in the index is expected to draw billions of dollars in passive investment into Argentina's stock market at a time of vulnerability. Markets are expecting the country's central bank to raise its benchmark interest rate later in the day to the highest in more than nine years to counter a slump in the peso and match a U.S. Federal Reserve hike.

In 2017 MSCI surprised markets by not promoting Argentina, saying it needed more signs that reforms were "irreversible".

It's a welcome outcome as well for investors who had been pinning hopes on an upgrade as the nation's stocks head for the worst year in nearly 10 years.

The inclusion, coupled with the International Monetary Fund deal, is expected to lead to capital inflows into the country, helping to ease pressure over the central bank to stabilize the currency, Jim Barrineau, head of emerging-market debt at Schroders in NY, wrote in a note. Accordingly, the share of South Korean stocks can decrease further.

Other analysts and investors were still a bit skeptical.

It was announced last night that Saudi Arabia would be added to the MSCI Emerging Markets for the first time.

One of the suggested solutions to this problem could create yet more difficulties though: if Aramco's natural dominance on the Tadawul index is artificially limited in order to curb the presence of industry stocks to a more palatable level, some investors interested in buying Tadawul index options because of Aramco's presence on it might think twice before doing it. Saudi Arabia should focus on reaping the economic benefits from the reforms being undertaken now.

"We won't just see ETFs, we will see more diversity in investment vehicles. Argentina and Saudi Arabia still have hurdles to tackle".

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