Continued reform is crucial to Saudi stock performance with weaker oil prices and geopolitical tensions identified as key risks
MSCI's decision to include Saudi Arabia as the 25th country to be represented in the MSCI Emerging Markets (EM) index is expected to attract significant capital inflows for the Middle Eastern country, according to reports from the Chief Investment Office of UBS Global Wealth Management.
The inclusion should translate into approximately $45 billion, with $10 billion from passive and $35 billion from active investments. Rival index provider FTSE's recent inclusion of Saudi Arabia in its own EM benchmark index earlier this year is estimated to add another $5 billion of inflows, increasing the chances of further near term outperformance for the country. Potential IPOs and an increased quota for foreign investor holdings might trigger additional inflows in coming months. The market should be supported by fundamentals, including higher energy prices, and the ongoing recovery in corporate earnings.
However, UBS Global Wealth Management's Chief Investment Office also points out some long-term risks for investors. Despite ongoing efforts to diversify the Saudi economy away from oil, energy still accounts for three-quarters of the country's exports and contributes two-thirds of its fiscal revenues. While climbing prices should support local stocks and Saudi authorities in easing fiscal austerity measures, renewed oil price weakness could affect the country's fiscal and external balances. Ongoing diversification efforts are therefore crucial for longer term success. Geopolitical tensions remain dominant in the wider region.
"While we expect a short-term increase in Saudi Arabia's performance following the MSCI inclusion, we also advise investors to keep an eye on fundamentals. Diversification is elementary for the country's long term economic success and the current momentum should be used to channel foreign direct investment into a range of strategically relevant sectors, which is a key objective of the Saudi Vision 2030,” said Michael Bolliger, Head EM Asset Allocation, UBS Global Wealth Management, Chief Investment Office.