Saudi flat ahead of MSCI decision; other markets down

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The Saudi Stock Exchange (Tadawul) has announced that MSCI, a leading provider of global equity indices, has upgraded the kingdom to "Emerging Market" from its previous "Standalone Market" status in its Annual Market Classification Review.

"MSCI index inclusion will be a historic milestone for the Saudi market as it will allow for sticky institutional money to make an entry in 2019 which will help deepen the market", said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.

Worldwide investors' expectations were that "the current privatization effort in Saudi Arabia will continue to grow the investable opportunity set available", Sebastien Lieblich, MSCI managing director and global head of equity solutions, said in a statement.

Both countries are now expected to benefit from investment from some of the world's largest fund managers as a result of the upgrades.

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Saudi Arabia's anticipated inclusion into the MSCI EM Index is likely to bring additional flows of around $35 billion and the potential IPO of Saudi Aramco will add another $50 billion in foreign flows depending on valuation. Argentina's bourse, which now has a market capitalization of US$ 98 billion, was relegated in 2009 after Buenos Aires introduced capital controls.

"Given the size of the Argentinian economy and its equity market, and equally important, capital market reforms over the past 12 months in our view justifies this decision", he said.

An investor walks past a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia June 29, 2016.

Have Saudi Arabia and Argentina done enough to warrant an upgrade? "With an increased number of global investors set to participate in the market, we see potential for increased corporate transparency [eg, more detailed disclosure], stronger interaction with investors and growing awareness of GEM peer groups among corporates [thereby enhancing performance]".

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Maurel estimates it will lead to $35 billion of inflows.

Bassel Khatoun, managing director, Frontier and MENA, Franklin Templeton Emerging Markets Equity, said: "We expect that foreign ownership levels will substantially increase, which at approximately 2%, significantly lag those of the UAE and Qatar (14% and 9% respectively)".

If Saudi gets the nod, reclassification would happen in two steps as part of MSCI's May and August 2019 reviews. Neither decision was assured, and together, they could prompt a relief rally after a selloff knocked US$2.7 trillion from emerging economies since late January amid threats of a global trade war and higher U.S. rates.

The MSCI Saudi index now contains 32 stocks, all listed entities on the Tadawul market, which are likely for inclusion in the MSCI EM index.

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According to Raghu, Saudi Arabia is projected to have a weight of 2.7 percent in the index, with the possibility to rise to about 4.6 percent considering the proposed public offer of 5 percent of the shares of Saudi Aramco. "Other sectors including utilities, insurance, retail and real estate account for the remainder", Merrill Lynch said.

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