Investors have flocked to Saudi Arabia following market-friendly reforms and the announcement that the Kingdom will be promoted to emerging market status next year.
Saudi Arabia clears hurdles for foreign investors
Index provider MSCI said this week that Saudi Arabia will be integrated into its MSCI Emerging Markets Index in the third quarter of next year following a two-step inclusion process. It cited “a number of regulatory and operational enhancements which [have] effectively increased the opening of the market to international institutional investors.”
Saudi Arabia has also not been added to the most recent reincarnation of Donald Trump’s “travel ban”, which was upheld by the US Supreme Court this week.
KSA the only ETF option – for now
The only Saudi Arabia-focused fund on the market in the US, the iShares MSCI Saudi Arabia ETF (KSA), has already ballooned from around $14 million in January to $264 million this week.
KSA is one of the fastest growing funds so far in 2018, and one of the best performing single country ETFs this year, returning more than 21% year to date.
This compares to the broader MSCI Emerging Markets Index, which is down more than 7% in the same period.
KSA costs 0.74% per year and launched in 2015. Although iShares offers the only product in the US market, Franklin Templeton has also filed with the US Securities and Exchange Commission to launch another Saudi Arabia-focused ETF, which may be a cheaper option. Invesco has also recently launched the first such fund for European investors.
Once added to the index, Saudi Arabia will make up around 2.6% of the exposure, on a similar level to Russia and Mexico. Saudi Arabia’s index is financials and materials top heavy, with 37% and 32% exposed to these sectors respectively.
KSA could see boost in returns of 55%
Although investors have already bought into the recent reforms made by the Crown Prince Mohammed bin Salman prior to the MSCI announcement, analysts expect that KSA could see even more gains before it joins the index.
Bloomberg reported that the 20 countries upgraded to MSCI emerging market status since 1994 have seen a median return of 55% in the 12 months before joining the index.
But similar to the inclusion of Qatar and Pakistan in 2014 and 2017, investors in Saudi Arabia are likely to sell off their holdings once it joins the index next year.