Saudi Arabia to join MSCI emerging markets index

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Map of Saudi Arabia through magnifying glass © Naruedom Yaempongsa /123RF Stock PhotosAs of close of business on May 28, some Saudi Arabian stocks will be included in the MSCI Inc.’s emerging markets and ACWI indexes as the first step of a two-step process.

This two-step inclusion will mean the MSCI Saudi Arabia investable markets index will represent about 2.6 per cent of the emerging markets investable markets index on a pro-forma basis.

Citing the benefits of Saudi Arabian exposure, MSCI noted the country has demonstrated potential diversification benefits and that inclusion may expand the investment opportunity set. “These include the market’s past dividend yield, its distinct sector composition, low sensitivity to other emerging markets and its previous natural currency hedge,” said Saurabh Katiyar, vice-president of the equity solutions team at MSCI, in a blog at the end of March.

While past yields can’t indicate future performance, Saudi Arabian equities have had dividend yields above average since September 2014, he wrote, noting over the last four years, on average, Saudi Arabia’s yield has exceeded the emerging markets’ yield by 140 basis points.

Katiyar also touted the industry’s diversity benefits, noting Saudi Arabia’s sector composition is different than the emerging markets. For example, as of Feb. 28, 2019, financials and materials were over 75 per cent of the investable market index and information technology had no representation in Saudi Arabia, though it’s one of the biggest sectors globally.

“This distinct sector composition contributed to Saudi Arabian equities’ low correlation to other emerging markets, exhibiting low-to-negative correlation on a one-year rolling basis (the correlation has increased more recently),” wrote Katiyar.

When leaving home country borders, investors are exposed to currency risk, noted Katiyar, yet currency actually played a role in Saudi Arabia’s outperformance in 2018. “As the Saudi riyal is pegged to the U.S. dollar, U.S. dollar investors were previously unaffected by the riyal’s fluctuations with other currencies. While U.S. dollar appreciation impaired emerging markets in 2018, Saudi Arabia outperformed emerging markets as a whole. Currency was one of the main contributors to Saudi Arabia’s outperformance in 2018, adding 4.3 per cent to performance.”

The inclusion of Saudi Arabia followed regulatory and operational enhancements in the country’s equity market, which effectively improved market access for these investors, he said.

MSCI’s inclusion of Saudi Arabian stocks will follow their inclusion in the S&P Dow Jones and FTSE Russell indexes earlier this year.

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