No Oil Worries: MSCI Pushes Saudi ETF Higher

Indexing behemoth MSCI’s (NYSE:MSCI) decision to possibly upgrade Saudi Arabia to the emerging market status next year came at the right moment for the country. The latest decision pushed up oil-rich Saudi’s stocks to 18-month highs and offered Saudi ETF iShares MSCI Saudi Arabia Capped (HM:KSA) a 6.3% gain on June 21, 2017 brushing aside the fact that oil has slipped to a bear territory.

The oil kingdom anyway has the Middle East’s largest equity market. And now on June 20, 2017, MSCI noted that it will add the MSCI Saudi Arabia Index in its 2018 Annual Market Classification Review for a likely inclusion in the MSCI Emerging Markets Index.

Prolonged investor-friendly efforts by the country’s capital markets regulator and stock exchange including “facilitating access to foreigners and implementing T+2 settlement in order to attract funds from abroad” actually helped Saudi to attain the height, as per an article published on Bloomberg (read: What Does the MSCI Inclusion Mean for China A Shares and ETFs?).

HSBC Holdings Plc (LON:HSBA). noted that the possible addition to the MSCI index in 2018 would help Saudi Arabia securities see passive inflows of about $9 billion. Saudi now expects the process to be faster rather than linger on the sidelines for a long time.

The timing of the announcement was crucial as oil retreated to the bear market despite the Saudi-led OPEC output cut. Surging U.S. supplies seem to be the culprit. United States Brent Oil (AX:BNO) lost about 22.2% in the last six months while United States Oil (V:USO) ) was down about 24% (read: 5 ETFs to Buy as Crude Crashes on Inventory Built).

The latest crash in crude prices was almost sure to hurt Saudi ETF, but MSCI saved it. Also, tension is growing in the Middle East as the Saudi Arabia and other Arab states have recently cut their diplomatic ties with Qatar.

As per Reuters, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain have canceled their transport links with top liquefied natural gas (LNG) and condensate shipper Qatar. Also, Qatar has been barred from the Saudi-led combination fighting in Yemen, as per CNBC. All these issues may bother the Saudi economy some way or other (read: Stay Away from These Middle East ETFs on Gulf Rift).

Investors should note that the MSCI move, if it materializes soon, would go a long way to help the Saudi economy in the form of greater foreign capital inflows thanks to improved accessibility. Along with several analysts we too believe that given continued oil worries for the last three years, Saudi needed to drive away its economic focus from oil (read: Will OPEC Feud Harm Oil ETFs?).

KSA in Focus

The $11.4-million fund looks to track the MSCI Saudi Arabia IMI (LON:IMI) 25/50 Index and is a home to about 72 stocks. The fund has concentration risks, both sector-wise and company-specific. Financials (37.65%) and Materials (32.75%) are the top two sectors of the fund. KSA is heavy on Saudi Basic Industries (15.88%) and AL Rajhi Bank (10.55%), and charges 74 bps in fees.

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