As Saudi Arabia prepares to join the MSCI Emerging Markets Index in the second half of 2019, it could attract inflows of $10 billion from passive investors, Washington-based The Institute of International Finance (IIF) noted in a recent report.
“Given Saudi Arabia’s allocated weight and the fact that $1.9 trillion in assets are benchmarked to the MSCI EM index, we expect inflows of $10 billion from passive investors,” IIF said.
Potential allocation from active investors could go up to $30-$40 billion, but the exact allocation is hard to project, as some of the investors will use market liquidity to close their positions, the report added.
In June 2018, MSCI announced the addition of Saudi Arabia to its Emerging Markets Index.
“Addition to the MSCI EM Index would acknowledge Saudi Arabia’s reforms, particularly the establishment of a sound stock market system, which should boost confidence among investors and attract large equity inflows,” the IIF report added.
Stock markets have historically rallied following upgrade announcements, as witnessed with UAE and Qatar in 2014 and Pakistan in 2017. Accordingly, IIF expects Saudi equities to gain momentum over the next 10 months, before facing a correction like other markets in the past.
Saudi valuations are attractive relative to historical levels, but they seem stretched on a P/E basis relative to EMs, according to the report.
However, IIF expects that high valuations will likely moderate following the MSCI inclusion next year.
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