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It'll Be A While Before Saudi Arabia Gets An EM Upgrade

May 16, 2016 8:09 am
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The iShares MSCI Saudi Arabia Capped ETF (NYSE: KSA), the lone exchange-traded fund dedicated to stocks in the Gulf Cooperation Council (GCC) nation, is down nearly 1.1 percent year-to-date, a disappointing performance when noting the United States Brent Oil Fund, LP (NYSE: BNO) is higher by 19.5 percent.

Will Saudi Arabia Make The Leap To EM Status?

While the iShares MSCI Saudi Arabia Capped ETF launched in the midst of an epic slide in oil prices, the fund was viewed as a potential play on two other themes: the liberalization of the Saudi economy — including increased access for foreign investors, and the kingdom's eventual ascent to the widely followed MSCI Emerging Markets Index.

Related Link: Meet Saudi Arabia’s New Oil Minister

Depending on one's perspective, Saudi Arabia's ascent to that index is a near-term disappointment because, if it happens, it is going to be awhile.

Currently, Saudi Arabia is not even a member of the MSCI Frontier Markets Index or the iShares MSCI Frontier 100 ETF (NYSE: FM). Nor is the kingdom even on index provider's list for potential inclusion in the emerging markets benchmark.

However, Credit Suisse sees Saudi Arabia making its way to the MSCI Emerging Markets Index…in 2019. Credit Suisse believes MSCI will begin reviewing Saudi Arabia for possible inclusion in its emerging markets benchmarks next year.

Qatar And UAE Leading The Way, Perhaps

Saudi Arabia's fellow OPEC members Qatar and the United Arab Emirates prove it is possible to make the leap from FM to the iShares MSCI Emerging Markets Indx (ETF) (NYSE: EEM), as those are the only two Middle East nations to earn that promotion. However, investors should also remember that Qatar and UAE were on MSCI's list for possible frontier-to-emerging promotion for seven years. It is believed that Pakistan, currently FM's fourth-largest country weight at 10.4 percent, is going to be the next country to make the FM-to-EEM jump.

Saudi Arabia has been bolstering its efforts to lure foreign investors while liberalizing its capital markets in a bid to land the MSCI promotion. The kingdom recently boosted foreign investor limits to $5 billion from $1 billion, according to Gulf Business.

Still, equities there remain tightly correlated with oil prices. Underscoring that correlation, the “Tadawul has slumped 30 per cent over the last year, in line with a 29 per cent decrease in Brent prices over the same period,” noted Gulf Business.

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