Strategy Note /
Saudi Arabia

Saudi MSCI EM inclusion: SAR22.4bn inflow expected in 2nd tranche

    Irfan Ellam
    Irfan Ellam

    Director, Head of Research

    SNB Capital
    8 August 2019
    Published by

    MSCI announced the results of the August 2019 Quarterly Index Review (QIR) for the MSCI Equity Indexes, which resulted in no changes in the constituents of the MSCI Saudi Index of 31 stocks. Saudi will have a weight of 2.83% in the MSCI Emerging Markets index. Saudi’s addition to the MSCI Emerging Markets index is expected to result in a total inflow of cSAR44.8bn (cUS$11.9bn) from passive funds, of which the second tranche represents 50% (i.e. SAR22.4bn) of total inflows. The changes for the second and final tranche of the inclusion of the Saudi market into the MSCI index series will be made as of the close of 27 August 2019 (with an effective date of 28 August 2019).

    Following the implementation of the second tranche of inclusion, Saudi will be the ninth largest constituent of MSCI Emerging Markets index. For the second tranche all changes to be made as of the close of 27 August 2019, (with an effective date of 28 August 2019). The Saudi market is projected to have a weight of 2.83% in the MSCI Emerging All Cap. This is expected to result in a total inflow of cSAR44.8bn (cUS$11.9bn) mainly from passive funds, of which the second tranche represents 50% (i.e. SAR22.4bn) of total inflows.

    The MSCI Saudi index consists of 31 stocks (see Exhibit 3), which are expected be added at their full Foreign Inclusion Factor (FIF) – adjusted market capitalisation 

    Similar to the first phase, we expect the majority of the trades to be executed on the closing price of 27 August during the auction period, and on the effective date, also during the closing auction period. This is due to passive funds desire to minimise tracking errors.

    Although not implemented in the August 2019 QIR, we believe removal of ownership limits for foreign strategic investors is a positive development, with material flow implications for certain constituents of the MSCI Saudi index.

    In June 2019, the Capital Market Authority (CMA) removed the limit for strategic foreign ownership in Saudi companies. However, the ownership limit for Qualified Foreign Investors (QFIs) remains subject to the existing ownership limit of 49%.

    We believe removing foreign strategic shareholders from FOL calculations would have some index implications for MSCI Saudi. The said change would increase the available room for foreign investors by making the Limited Investability Factor (LIF) no longer applicable for certain companies that are currently subject to it.