Emerging Market: Saudi Arabia On MSCI's Radar

MSCI Inc. MSCI, the provider of some of the most widely followed equity benchmarks in the world, unveiled its annual market classification Tuesday.

While the big news centered around the index provider's decision to finally promote China A-shares to the MSCI Emerging Markets Index, MSCI revealed some other noteworthy tidbits.

In news that's sure to affect the iShares MSCI Saudi Arabia Capped ETF KSA, MSCI said it's launching a consultation with clients on potentially including Saudi Arabian stocks in the MSCI Emerging Markets Index. Saudi Arabia's full inclusion in the widely followed MSCI Emerging Markets Index wouldn't take place for another year.

Why It Matters

The news is expected to boost foreign investors' interest in the kingdom’s Qualified Foreign Investor (QFI) program. KSA is the only ETF in the U.S. dedicated to Saudi stocks. The ETF debuted in 2015 and now has $11.1 million in assets under management.

“The Kingdom’s addition to the Watch List and anticipated inclusion in the MSCI Emerging Market Index will ultimately make Tadawul, its constituent listed companies and investors who trade on it, benefit from what is anticipated to be a greater allocation of weighting of global emerging market funds to the Exchange,” said Tadawul, Saudi Arabia's major equity bourse, in a statement. “Overall, growth in emerging markets globally is expected by the International Monetary Fund to improve for the second consecutive year, rising to a projected 4.5 percent in 2017, compared to 4 and 4.1 percent in 2015 and 2016 respectively.”

What It Looks Like

KSA, which tracks the MSCI Saudi Arabia IMI 25/50 Index, holds 72 stocks, a combined 70 percent of which hail from the financial services and materials sectors. Saudi Arabia is known for being one of the largest oil producers in the world and is a member of the Organization of Petroleum Exporting Countries. The upcoming IPO of Saudi Aramco, the country's state-run oil behemoth, is seen as part of the kingdom's effort to lure foreign investors.

Tadawul's new market operating model is seen as integral to Saudi Arabia's effort to gain emerging markets status.

“The new model includes, among other noted improvements,the expansion of the settlement cycle from T+0 to T+2, the introduction of a proper delivery versus payment (DvP) settlement provision, proper failed trade management, and the introduction of short selling and securities borrowing and lending facilities, said MSCI.