Saudi Arabian equities are poised to attract billions of dollars in foreign investment thanks to MSCI’s move to upgrade the Kingdom to ‘emerging market’ from its previous ‘standalone market’ status.

Last week the MSCI said beginning in June 2019, it will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets (EM) Index.

This inclusion gives Saudi stocks a representing weighting on a pro forma basis of approximately 2.6% of the index with 32 securities.

Industry experts are saying this reform will attract new foreign investment into the Kingdom which has implemented a number of regulatory enhancements over the past three years to open its domestic equity market to international institutional investors.

With $1.9 trillion of funds tracking MSCI’s EM index, the 2.6% that Saudi will initially command, is likely to result in equity flows of approximately $40 billion, said Bassel Khatoun, managing director, frontier and MENA, Franklin Templeton emerging markets equity.

‘Foreign investors’ portfolio holdings in the Saudi Stock Exchange currently account for a mere $9 billion, making the level of potential inflows into Saudi Arabia quite unprecedented,’ he said.

Franklin Templeton anticipates the bulk of the investment coming from emerging markets like China, Korea and Taiwan. It also expects that foreign ownership levels will substantially increase, significantly lagging those of the UAE and Qatar.

Where to invest?

The investment opportunities within the country is primarily in the banking, consumer and healthcare sectors, according to Oliver Bell, portfolio manager of T. Rowe Price’s Middle East and Africa equity and frontier markets equity strategy.

‘High quality Saudi banks are beginning to feel the effects of the improving economy, with loan growth increasing as the recent oil price rise begins to filter through,’ the Citywire A-rated manager said.

‘Saudi banks are also direct beneficiaries of the US Federal Reserve’s rate hike cycle.

‘We see Saudi British Bank – a subsidiary of HSBC, which is currently merging with RBS subsidiary Alawwal Bank – as a leader in this space.’

In 2016, Saudi Arabia established its Saudi Vision 2030 plan to diversify its economy, reduce the country’s dependence on oil as a source of income, and develop public sectors like education, infrastructure, tourism and healthcare.

As part of the scheme, the government said it will increase healthcare expenditure by 10% to 35% by 2020. The funds will be used to improve the efficiency of hospitals through information technology, increase staff training, and improve infrastructure and safety standards, to name a few.

According to Bell, currently, there is an undersupply of hospital beds in Saudi. ‘The country has just 2.2 hospital beds per 1,000 people, below the 2.5 global average and far lower than the 6.3 average in Europe.

‘We believe companies such as well-managed hospital group Al Mouwasat Medical will be at the forefront of the growth likely to be witnessed by this sector,' he said. 

What about IPOs?

The widely anticipated initial public offering (IPO) of the country’s oil major Saudi Aramco is another investment vehicle that is expected to potentially add another $50 billion of inflows into the domestic market.

Franklin Templeton’s Khatoun, said the IPO will in fact trigger more privatizations across the Kingdom and set the standard for local corporate governance and transparency.

‘While Saudi has already implemented reforms to align better with international standards, an Aramco listing on a deep, actively traded market will attract a broader range of global investors who will help further enhance corporate governance frameworks,’ he explained.

Saudi also has a pipeline of around $150 billion of other potential IPOs coming to market over the coming three-to-five years which would further increase the benchmark weighting, T. Rowe Price’s Bell added.