Index provider FTSE Russell refrained from adding Saudi Arabia to its index of emerging market countries amid its September country classification annual review. Neighbor Kuwait was added to the list.
FTSE Russell said Saudi Arabia will soon meet criteria to be promoted from unclassified status to a secondary emerging market, according to a statement on Friday. Saudi Arabia will be assessed again in March, it said.
Capital markets regulators and the stock exchanges in both countries have introduced infrastructure reforms in attempts to attract local and international investors. In Saudi Arabia, the improvements are part of a broad program to diversify the country’s economy away from oil, its main export, and ahead of the sale of shares in state-controlled oil company Saudi Arabian Oil Co.
The sale is being tipped as the biggest initial public offering in history. Achieving emerging market status could trigger a surge in passive inflows from funds tracking the Tadawul benchmark around the world.
“Saudi Arabia has made significant strides to enable its capital markets to open up to international institutional investors, which is a clear testament of the relentless efforts of the Saudi Government,” Georges Elhedery, Deputy Chairman and CEO of HSBC Middle East, North Africa and Turkey said in an e-mail. “Foreign investor sentiment continues to be positive.”
Inclusion of Saudi Arabia could lead to $4.4 billion in flows to the country’s equities market, assuming it would represent 2.7 percent of the index, according to Mohamad Al Hajj, an equities strategist at the research arm of EFG-Hermes Holding in Dubai.
Considering Saudi Aramco’s IPO, the country’s weight in the index could reach up to about 5 percent over time, said Bassel Khatoun, chief investment officer of Middle East North Africa equities at Franklin Templeton Investments in Dubai.
Kuwait’s addition to the FTSE emerging markets list may attract flows of $822 million as the country is expected to represent 0.5 percent of the benchmark, EFG-Hermes’s Al Hajj said. Franklin Templeton’s Khatoun, who also predicts a 0.5 percent index weighting, estimates flows of about $600 million.
“The country’s focused approach towards economic reforms will continue to yield positive results as it increasingly gains attention from the region and beyond,” HSBC’s Elhedery said.
Within the Gulf, Qatar and the United Arab Emirates have already attained FTSE’s emerging market classification.