Saudi Crown Prince Mohammad Bin Salman (2nd-L) ordering coffee with former New York mayor Michael Bloomberg (L) at a coffee shop in New York. Image Credit: AFP

DUBAI: Global index provider FTSE Russell plans to include Saudi equities in its emerging market index in a year from now.

The move, announced on Thursday, is expected to result in an inflow of up to $7 billion (Dh25.69 billion), according to fund managers, as the region’s biggest equity market is expected to have a weightage of 2.7 per cent on the index. That will make it the biggest market in the Middle East on the gauge.

The inclusion of Saudi equities, which has the market capitalisation of $500 billion, is considered key in attracting billions of dollars in passive and active funds. Market participants will await the announcement from the MSCI, another index provider, in June, which has potential to attract more than $40 billion in fund flows.

“We have worked closely with index providers and the global investment community to ensure that our capital market reform programme sets the highest regulatory standards to meet the needs of both current and prospective investors. Saudi Arabia’s inclusion in global benchmarks will further strengthen our position as the largest market in the Middle East region and we will work closely with the market during the transition period,” Mohammad Al Kuwaiz, Chairman, Capital Markets Authority (CMA), said in a statement.

Post Thursday’s announcement, the Tadawul index edged lower after registering gains for seven straight sessions. The index closed 0.37 per cent lower to 7,870.87 on the day, after gaining 2.45 per cent in the past seven sessions.

“In the short term, it might lead to outperformance of the Saudi market. Markets upgraded to the EM status tend to outperform in the 12 months ahead of the actual inclusion,” M.R. Raghu, Managing Director, Marmore Mena Intelligence, told Gulf News.

Game changer

The decision to include the index in the emerging markets gauge may attract billions of dollars of capital flows into the kingdom.

“Inclusion of Saudi Arabia in the FTSE emerging market index is expected to be a game changer for the local and regional stock markets. With an estimated $200 billion of passive assets tracking the FTSE Emerging Index, the inclusion of Saudi Arabia could attract approximately $5.4 billion in passive inflows,” M.R. Raghu, Managing Director, Marmore Mena Intelligence, told Gulf News.

More money could follow when the index provider plans to increase the weight of Saudi Arabia on the index to 4.6 per cent, after the 5 per cent public offering of Aramco shares.

Groundwork

Saudi Arabia’s regulator and the exchange had been working to implement changes in the current framework for an upgrade. They have made changes to the settlement cycle, and lowered the assets under management for foreigners to trade in the equity market among others.

“The CMA and Tadawul deserve much credit for the work they have done over the past few years to enhance the market’s regulatory framework and infrastructure — it has created an environment much more familiar and accessible to international investors,” said Georges Elhedery, HSBC’s CEO for Middle East, North Africa and Turkey. He expects to see at least $7 billion of inflows as a result of the inclusion.

The move will also provide an access to a market, which was not part of the mainstream earlier, and add value to the diversification offering of fund managers.

“It will become instantly a market too big to ignore and widen the investment opportunities for EM investors. It will also help the country diversification of the index as we will end up with one more ‘big’ EM country, and one which is quite de-correlated from the large North Asian indices which are dominating the investment universe,” said Mathieu Negre, Head of Global Emerging Markets at Union Bancaire Privee.