Dubai: The inclusion of Saudi Arabia’s equity index in the MSCI Emerging Markets index is expected to attract billions of dollars’ worth of new investments into the Kingdom’s markets as well the broader Gulf markets.

Analysts said the upgrade to Emerging Market (EM) status is a “huge win for its capital markets,” and that it increases the weight of Gulf markets in the MSCI emerging market index.

“Looking at the GCC and Mena (Middle East and North Africa) regions more broadly, we think that the MSCI decision to upgrade Saudi Arabia will prove a transformative catalyst for exchanges amid rising global investor interest,” said Salah Shamma, head of investment for Mena at Franklin Templeton’s emerging markets equity.

“With improving fundamentals such as positive corporate earnings, higher oil prices, and non-oil GDP (Gross Domestic Product) growth, we believe a re-rating of regional markets is also warranted.”

Index provider MSCI on Thursday said it will include Saudi Arabia in its EM index starting from June 2019, attributing the upgrade to Saudi’s implementation of a number of regulatory and operational enhancements.

MSCI said Saudi Arabia will represent a weight of around 2.6 per cent of the index. MSCI’s indices are used by investment funds around the world, with around $1.7 trillion (Dh6.2 trillion) worth of funds benchmarked against its EM indices.

“Saudi has very low foreign ownership — less than 2 per cent of market cap, and hence, the upgrade has the potential to create around $30 billion of active and passive inflows into Tadawul by August 2019,” said Aarthi Chandrasekaran, vice president at Shuaa Capital.

“Overall, Saudi’s inclusion is positive for the region, as GCC weights in MSCI-EM have inched up significantly, and will be difficult to ignore by the global fund managers.”

Good value

UAE, already part of the MSCI EM index, has a weight of about 0.67 per cent.

But for the UAE’s markets more specifically, it’s not quite the same story when it comes the expected growth in fund flows.

“UAE markets have been directionless for some time now due to the absence of catalysts. We have some good value buys on Abu Dhabi banking names, but unfortunately, the interest in Saudi is overpowering the regional equities,” Chandrasekaran said.

Other fund managers that chose to remain anonymous told Gulf News that investor sentiment in the UAE is soured by the recent news on private equity group Abraaj filing for provisional liquidation. They also pointed out concerns regarding corporate governance after Air Arabia said it has $336 million (Dh1.2 billion) invested in Abraaj — nearly 10 per cent of the carrier’s assets.

The founder of Abraaj, Arif Naqvi, sits on the board of directors of Air Arabia.

“We would like to see more enforcement and a stronger grip on the corporate governance for listed companies in the UAE to be able to attract foreign investment that is expected to come to the region,” said Tariq Qaqish, managing director of Menacorp’s asset management division.