On Wednesday, June 20th 2018, index provider (MSCI) announced that they will include Saudi Arabia and Argentina in its widely tracked Emerging Market index, effective 2019. MSCI will employ a two-step inclusion process for Saudi Arabia which will include adding the securities during two time frames i.e. May 2019 Semi Annual Review and August 2019 Quarterly Review.
Saudi Arabia has grabbed attention from global investors after it announced the plans to take Saudi Aramco public last year. The oil producing entity, if and when, it goes public will be the largest traded entity in the world. However, concerns have been growing over the lack of transparency, ownership in the company among others.
The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries. With more than 845 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
EFG Hermes, FTSE Russell expect KSA attract up to $45 billion dollars’ worth of investment post the offering, Market authorities in Saudi Arabia have introduced a series of reforms in the last 18 months in order to align local capital markets with international norms. These reforms include reducing restrictions on international investors, opening up the country for investments and Saudi Vision 2030. As a result of these reforms, the index provider FTSE Russell upgraded the state to emerging economy status in March 2018.
Therefore, post the inclusion of Saudi Arabia and Argentina total tally of MSCI Emerging Markets would grow to 26 which includes Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
“MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process. The first inclusion step will coincide with the May 2019 Semi-Annual Index Review. The second step will take place as part of the August 2019 Quarterly Index Review” read the official statement released by MSCI.
A few hours after International Monetary Fund (IMF) finalized a $50 billion financing deal with Argentina to help stabilize its currency, MSCI announced its decision to reclassify the country in its Emerging Market index along with Saudi Arabia. Previously, Argentina was downgraded to frontier market status in 2009 after former populist President Cristina Fernandez imposed capital controls.
Highlighting the Argentina inclusion MSCI in the press release mentioned that, “MSCI Argentina Index will be included in the MSCI Emerging Markets Index coinciding with the May 2019 Semi- Annual Index Review. MSCI will continue to restrict the inclusion in the index to only foreign listings of Argentinian companies, such as American Depositary Receipts, as the feedback from international institutional investors stated that higher liquidity across the domestic market is needed before considering a shift from offshore to onshore listings. MSCI will reevaluate this decision as liquidity conditions on the Buenos Aires Stock Exchange continue to improve.”
MSCI is currently mulling over plans to upgrade Kuwait from Frontier Markets to Emerging Markets Index as well by the end of 2019.
