Emerging Markets, Frontier Markets, Stocks

Saudi Arabia Could Miss Out On MSCI Emerging Market Inclusion

By James Eugene

Saudi Arabia2Saudi Arabia’s acting chief executive has admitted that there is no certainty that the oil-rich nation could join the international index compiler’s emerging market index in 2017.

Last year, it was heavily suggested that Saudi Arabia was looking at joining MSCI’s emerging markets list, with the potential of increasing inflows into the country’s bourse. But the sentiment has recently changed. According to Reuters, Khalid al-Hussan, the acing chief executive of Saudi Arabia’s stock exchange (Tadawul), was quoted by EconomicME magazine claiming that “there is a still a level of uncertainty of when this could happen. There are multiple things to be considered, some of them within the control of the exchange”

He then added: “If you ask me, I wish for 2017. But whether this is going to happen of not, I don’t know”. Saudi inclusion in the index has been predicted to increase inflows of foreign investment by $35 billion, according to Bloomberg.

Settlement Issues

One of the major issues that Hussan wishes to talk to MSCI about is Saudi Arabia’s settlement cycle for equities, which operates on a T+0 basis (i.e: trades must be settled on the same day). This means that both domestic and foreign investors must have large sums of money to hand before executing trades, which “can be inconvenient given Riyadh’s time zone and its Sunday to Thursday business week”, says Reuters. By contrast, most developed and developing nations operate on a T+2 basis (i.e: settlement date is two days after trading).

Hussan added that it is unlikely that The Kingdom could diverge away from their T+0 system by 2017 as the decision to do so will probably take effect a year afterwards. Reuters have also mentioned that it is unclear whether or not MSCI’s decision to include Saudi Arabia in its emerging market index is purely down to its commitment to reform its equity settlement cycle.

Struggling Index

Despite claims of “diversifying”, Saudi Arabia’s massive exposure to a low oil price environment has resulted in a $98 million deficit. The Tadawul has also fallen by 14.56% since the start of 2016, ranking it among the worst performing frontier markets so far this year alongside other oil dependent nations such as Kuwait and Nigeria. Only 7 Saudi stocks have posted positive gains since the start of the year, such as Tihama Advertising (15.73%) and Saudi Dairy & Foodstuffs Co. (9.01%) The worst performing stocks have lost over 40% this year, with Al Alamiya Insurance and Takween Advanced Industries almost shedding half of their value.

The top 10 worst performing Saudi stocks so far in 2016 are shown below:




About James Eugene

Interested in Emerging and Frontier Markets. Currently working in an operations role at an asset management company in London.


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