Investors brace for FTSE verdict on Saudi Arabia, Kuwait

DUBAI • FTSE Russell is set to announce over the weekend in the Middle East if it will add Saudi Arabia and Kuwait to its list of emerging markets (EMs) in what could spur a surge in inflows to both markets and be a prelude to MSCI Inc inclusion next year.

While recent market infrastructure improvements have been made in both countries, analysts and investors said Kuwait may be closer to being added than Saudi Arabia, which is aiming to modernise its market ahead of the sale of shares of state-controlled oil company Saudi Arabian Oil Co (Saudi Aramco) in what is being tipped as the biggest initial public offering (IPO) in history.

FTSE is expected to announce its country classification annual review today after markets close in the US.

Both countries have “a decent chance” of being upgraded today as on paper they both meet the minimum requirements, “but we believe that Kuwait’s chances are higher”, said Mohamad Al Hajj, an equities strategist at the research arm of investment bank EFG-Hermes in Dubai.

EFG-Hermes remains overweight on Kuwait and underweight on Saudi Arabia.

He estimates that Saudi Arabia could attract close to US$4.4 billion (RM18.61 billion) in passive inflows, while Kuwait could add US$822 million.

A positive decision over the weekend would, in theory, bring Saudi Arabia closer to a potential MSCI inclusion next year, “given that both index providers look at similar criteria for EM inclusion”, Al Hajj said.

“We prefer to play the potential inclusion in Saudi Arabia through the banks, and we have Al Rajhi and Samba in our Middle East and North Africa Top 20 list.

“In Kuwait, NBK, Zain and Human-soft are our top picks,” he said.

An FTSE inclusion of Saudi Arabia could be delayed beyond the September review as the index provider and its advisory councils “may need more time to test the infrastructure changes”, said Jaap Meijer, the head of research at Dubai-based investment bank Arqaam Capital, who sees Kuwait’s chances as higher.

“The March country classification window remains an option, but FTSE would clarify its proposed timeline, either way, during the upcoming September review,” Meijer said.

“Kuwait chances appear to be slightly better, but FTSE may need to test further as well.”

He estimates Kuwait could attract passive inflows of US$700 million, while Saudi Arabia’s could rise as high as US$6.5 billion following a Saudi Aramco IPO.

An addition by FTSE over the weekend would suggest that international investors are comfortable enough with the current market infrastructure and could be followed by MSCI, Meijer said.

“However, we do note that the two index providers sometimes differ in their criteria and have seen discrepancies in what countries are classified under.

“For example, despite MSCI deciding to upgrade the country to EM status in 2013, Qatar was only upgraded by FTSE in 2015.” — Bloomberg