Dubai: Saudi Arabia’s inclusion in the MSCI and FTSE EM indexes will be a welcome boost for capital markets in the region.

The Kingdom’s potential upgrade to emerging market will give access to more international investors and bring greater liquidity to the region’s largest market. This will benefit the local banks and financial services’ industry in addition to supporting the Kingdom’s 2030 vision to diversify the economy away from oil.

According to Franklin Templeton Investments, the 20 markets that have been added to the MSCI EM since 1994 have seen an average increase in performance of around 60 per cent over the subsequent 1-2 years, with a median 27 per cent outperformance of the index. In the 12 months before the actual inclusion of Qatar and Dubai, these markets rallied 48 per cent and 115 per cent respectively.

“Saudi Arabia is currently an off benchmark market, meaning it is not currently part of any major indices such as the MSCI EM or FTSE EM indices. As such, global emerging market investors benchmarked against these indices currently have little incentive to invest. Indeed, our latest analysis suggests allocation to Saudi Arabia among GEM investors remains relatively low at just 0.17 per cent,” Hootan Yazhari, research analyst at Bank of America Merrill Lynch.

Apathy

Rising uncertainties in the economic outlook in Saudi Arabia given the soft macro backdrop, largely driven by weakness in oil prices, have driven allocation levels even lower over the past 18 months. Analysts say the current allocation levels are now significantly below the levels implied by our base case MSCI EM weighting for Saudi Arabia of 2.4 per cent, suggesting a severe level of apathy towards the market and little belief in its inclusion prospects.

“Saudi’s inclusion on the MSCI watch list in June 2017 was an encouraging first step towards its potential inclusion in the MSCI EM index. Further, we believe it to be an acknowledgement of the positive and significant changes the Saudi Capital Markets Authority (CMA) introduced, which make the market more accessible and transparent,” said Victoria Cherevach, an analyst with BoAML.

Should Saudi Arabia be included in the MSCI Emerging Markets index, BoAML analysts believe its weighting could potentially make it the seventh largest constituent ahead of Russia and Mexico. “In such a scenario, we believe Saudi Arabia would no longer be a market that can simply be ignored,” said Cherevach.