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Saudi Arabia, Argentina Upgraded To ‘Emerging Markets’

Investing in the effervescent emerging markets space is about to become even more exciting. MSCI (Morgan Stanley Capital International), a leading provider of global equity indexes with $14 trillion in investors’ assets, is about to grant an upgrade to Saudi Arabi and Argentina by adding them to the MSCI Emerging Markets Index.

MSCI has indicated that Argentina is still a toss-up for the upgrade. If it succeeds, this will mark the second time the country has been listed in the EMs category, having been downgraded to the more volatile MSCI Frontier Markets Index in 2009.

But it’s Saudi Arabia’s inclusion that’s driving the main excitement.

At a market cap of around $500 billion, the Saudi stock market is just a small fraction of the $30-trillion American market. But make no mistake: It’s not only one of the most attractive markets in the region, but is also a top performer. The Tadawul All Share Index (TASI) is up 15 percent in the year-to-date, vastly outperforming its peers as well as S&P 500 Indexs (SPX) 1-percent return.

The Riyadh market started to emerge from its reclusive state after the Saudi government opened it up to foreigners in 2015. Lately, it has become the hottest developing market thanks to the government’s ongoing privatization efforts as well as intensified efforts to stamp out corruption in state agencies. Related: Can Trump Counter Soaring Gasoline Prices?

But perhaps the most exciting part is that the expected sale of shares in oil behemoth Saudi Aramco that could become a game-changer for the entire Saudi stock market. The oil giant could receive a valuation of at least $2 trillion, making it by far the largest publicly traded company (if it ever happens).

That could inject a lot of liquidity into the market. Then of course there’s that ocean of oil sitting in the country’s rich reserves, which further improves the value proposition. Oil contributes 42 percent to GDP and 90 percent of Saudi Arabia’s export earnings. With oil prices on the up and up, Saudi’s economy could enter a major expansion phase.

Opening the Door

Despite the obvious attractions of the Saudi market, the government has imposed gobs of restrictions that have largely kept the small fry out. The market is tilted heavily in favor of big investors though small investors can still use swap agreement programs (that leaves them without regular shareholder rights including the right to vote).

But the introduction into the MSCI Emerging Markets Index has now opened the door for everyday investors to get a piece of the Arabian action.

Related: The Saudis Won’t Prevent The Next Oil Shock

The index captures approximately 85 percent of the free-floated market capitalization of 24 emerging economies. It covers a total of 845 companies with total market cap of $5.3 trillion as of May 31, 2018. It’s top 10 holdings are mainly Chinese and South Korean companies including Tencent, Alibaba, Samsung Electronics, Taiwan Semiconductors, China Construction, Baidu and China Mobile.

The index has an year-to-date return of -2.61 percent mainly due to climbing interest rates  in the U.S. as well as escalating trade tensions between the country and its trading partners. The one-year return is a more palatable 14 percent, while the annualized five-year return is 4.5 percent.

The index will have a rather limited exposure to the Saudi market to begin with of just 2.6 percent after a two-step inclusion in May and August next year. Not much, but good enough for a start.

By Alex Kimani for Safehaven.com

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  • Mamdouh G Salameh on June 30 2018 said:
    While Morgan Stanley Capital International’s (MSCI) upgrading Saudi Arabia to its Emerging Markets Index may invigorate the Saudi Stock Market, Tadawul, it will have no impact whatsoever on the IPO of Saudi Aramco.

    Saudi Arabia will soon withdraw the IPO quietly altogether as it no longer needs the money from the IPO in view of rising oil prices.

    Saudi Arabia withdrew the IPO from international listing because of two reasons: one is because its own valuation of $100 bn is far bigger than Wall Street’s and other financial houses’ and also because foreign investors would not even consider the IPO without an independent auditing of Saudi proven reserves. The second is the risk of American litigation.

    Moreover, listing Saudi Aramco on the Saudi Stock Market will overwhelm it and could create a serious liquidity problems.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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