Saudi market weight rises to 4% in Emerging Markets Index: MSCI

Raman Subramanian, Managing Director and Head of Index Regional Research Solutions at MSCI

Raman Subramanian, Managing Director and Head of Index Regional Research Solutions at MSCI, said the inclusion of the Saudi market in Emerging Market indices contributed to increasing its weight to more than 4%, compared to 1% at the start of its inclusion in 2019.

The opening up of the Saudi market to foreign investors has enabled it to be added to the MSCI World Index, which helped attract significant financial inflows from investment funds and asset managers, he told Argaam.

The value of assets linked to MSCI indices amounts to about $16.5 trillion, a large part of which is managed through passive investments, he added.

Subramanian indicated that the volume of exposure to the GCC region within these indices is estimated at about $140 billion, of which the Saudi market has the lion’s share of about $80 billion. The inflows are expected to witness additional growth if active fund managers decide to boost their weights in Saudi Arabia and the GCC countries.

“The inclusion of GCC markets in MSCI indices began in 2014, with a representation of 1.5%, before rising to about 7% currently, with the Saudi market leading in the MSCI Emerging Markets Index,” said Subramanian.

He added that MSCI relies on two main criteria to build market indices, namely: "investability" and "market accessibility", noting that the first criterion includes liquidity, the diversity of the investor base, and the percentage of free float shares, which must not be less than 15%.

Subramanian also pointed out that there are exceptional cases of including some large-cap companies despite their limited free float, citing Saudi Aramco as an example, given its size and influence in the market.

He stated that the MSCI Investable Market Index (IMI) is divided into three categories according to market capitalization: large-cap companies that represent 70% of the index, medium companies (15%) and small companies (15%).

Companies that are capitalized at more than $3 billion have sufficient liquidity and qualifying free float are eligible to be included in the large or medium-cap segments, while those with a market capitalization of less than $400 million are included in the small-cap segment, provided they meet the liquidity requirements.

 
Subramanian pointed out that this structure enables the company to build indices that cover about 99% of investment opportunities in global markets, including the MSCI Saudi Arabia Index, which includes the three categories of companies, as well as the MT30 Index, which was launched in partnership with the Saudi Exchange (Tadawul) and includes the 30 largest Saudi companies by free market value, with the aim of providing a highly liquid investment tool for global investors.

Additionally, the inclusion of companies and markets in MSCI indices attracts foreign capital and helps improve governance, transparency and compliance with environmental and social standards, he said.

Subramanian asserted that GCC markets, led by Saudi Arabia, have become major investment destinations globally.

He concluded that the investor base interested in MSCI indices is diverse and includes asset managers in North America, Latin America, Europe and Asia, as well as retail investors, which makes the impact of a market's inclusion in the index broad and comprehensive globally.