Saudi Arabia Wins Emerging Market Status

Saudi Arabia is upgraded to become an emerging market and Argentina has rejoined the ranks in MSCI's latest review

Glenn Freeman 21 June, 2018 | 9:09AM
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Saudi Arabia

The world's largest oil producer Saudi Arabia has been promoted to an emerging market in MSCI's annual review of its classifications.

The inclusion of Saudi Arabia in the emerging markets index reflects growing confidence in the ongoing privatisation efforts within the Kingdom. FTSE Russell earlier this year said the country will join its emerging markets index in March 2019.

"International investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority and the Saudi Stock Exchange  have demonstrated," said Sebastien Lieblich, MSCI managing director.

"Their expectation now is that the current privatisation effort in Saudi Arabia will continue to grow the investable opportunity set available to them and hence, all other things being equal, contribute to an increased weight of Saudi Arabia in the Emerging Markets Index in the future."

The Kingdom's Capital Market Authority and Tadawul have further opened the domestic equity market to international institutional investors over the past three years. This included a complete overhaul of the Tadawul's operating model, across settlement, delivery methods and closing price mechanisms.

Emily Fletcher, manager of the BlackRock Frontiers Investment Trust (BRFI) notes the actions taken in recent years by Saudi Arabian authorities to further open the local equity market to international institutions.

"The Saudi Arabian market has much to commend it to a long-term investor, and in fact it could be one of the most sectorally diverse countries within the MSCI Emerging Market index," she said.

State-run oil firm Saudia Aramco is one of the most anticipated IPOs in recent years, with financial centres vying to host the flotation.

Argentina Regains Emerging Market Status

Argentina, the third-largest South American economy, behind Brazil and Mexico, was previously part of the MSCI Emerging Markets Index, before it was downgraded to a frontier market in 2009.

"In particular, international institutional investors expressed their confidence in the country's ability to maintain current equity market accessibility conditions, which is a key factor in MSCI's classification framework," according to MSCI.

However, given ongoing political uncertainty in the country, it also noted it "would review its reclassification decision were the Argentinian authorities to introduce any sort of market accessibility restrictions, such as capital or foreign exchange controls".

As Morningstar's Emma Wall wrote last week, inclusion in the MSCI Emerging Markets Index means both active and passive funds can invest in companies listed in the country, and can add significant foreign investment.

Argentina's inclusion is conditional, with only foreign listings of Argentinian companies included, such as American Depositary Receipts (ADRs). "International institutional investors stated that higher liquidity across the domestic market is needed before considering a shift from offshore to onshore listings," said MSCI, with this condition subject to ongoing review of the Buenos Aires Stock Exchange.

Alexander Arevalo, a fund manager with UK's Jupiter emerging markets debt team, thinks the country is "taking the right steps" by going to the International Monetary Fund (IMF). Argentina's Government has received a $50 billion bailout from the IMF, a decision approved by the IMF board on Thrsday.

BlackRock's Fletcher said the announcement of Argentina's inclusion is "validation of the substantial positive macro-economic reforms that Argentina has enacted over recent years".

"The government has made good progress in dismantling the protectionist structures of the economy, addressing currency controls, export taxes and energy subsidies. 

"With a one-year forward Price to Earnings ratio of around 10-times, and an already substantially devalued peso, the Argentine market looks attractive to foreign investors. Therefore, given the significant growth opportunities, we believe it represents a compelling investment destination for long-term investors," Fletcher said.

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Glenn Freeman  is Senior Editor for Morningstar Australia