MSCI adds Saudi Arabia Argentina to emerging markets index

"The inclusion of Saudi Arabia in the FTSE and MSCI Emerging Market indices are likely to increase the flow of foreign funds in Saudi Arabia", he said, added that MSCI classification is expected to result in approximately $10 billion of passive inflows into the country. Neither decision was assured, and together, they could prompt a relief rally after a selloff knocked US$2.7 trillion from emerging economies since late January amid threats of a global trade war and higher USA rates.

The nation was added to a watch list for a potential upgrade a year ago, and will now join nations including China, India, Turkey, South Africa and Brazil. "It's only a short-term lift to the asset class overall".

MSCI also said it will include the MSCI Kuwait Index in its classification review next year for a potential move from frontier to emerging markets.

The decision, which came as part of MSCI's semi-annual index review, follows the implementation of regulatory changes in the Saudi Arabian equity market which opened to worldwide institutional investors.

For Argentina, MSCI's reclassification will reverse a downgrade to "frontier market" status made in 2009 after the Latin American country imposed capital controls.

MSCI added China shares to its emerging markets benchmark this month but inflows have so far fallen short of expectations. The index compiler also said that due to lower liquidity in the nation's local markets, only foreign listings such as American Depositary Receipts will be initially eligible to enter the index.

Rosenbluth said he expects investors to add exposure to the iShares MSCI Saudi Arabia ETF (KSA.P) and Global X MSCI Argentina ETF (ARGT.P) ahead of the implementation of the changes.

Saudi Arabia has been gradually opening up to foreign investments as it seeks to reduce their reliance on- one of its main sources of revenues.

Dan Salter, Head of Equity Strategy and Research - Eurasia at Renaissance Capital, estimates that the decision to include Saudi on the MSCI Index will result in an inflow of nearly $3 billion in passively managed funds to the country's markets.

Mohamad Al Hajj, equities strategist at the research arm of EFG-Hermes Holding, estimated that upgrades by FTSE and MSCI could lead to passive and active inflows of between $30 billion and $45 billion. Allowing foreign funds into the Saudi stock market will facilitate the sale of the planned IPO.

"Since MSCI added it to its watch list in June 2017, the necessary infrastructure has been upgraded and we believe all required criteria have been met". The IPO could happen before the end of 2018, according to Capital Markets Authority Chairman Mohammed El-Kuwaiz.

"From a market liquidity standpoint, connecting the Saudi market to the rest of the world and having the free movement of capital from global investors to the Saudi market only helps a listing of the size and scale of Saudi Aramco", he said.

In Argentina, hopes for an upgrade had faltered as the peso tumbled, making the central bank jack up interest rates to a world-beating 40 per cent and leading the government to turn to the International Monetary Fund for a record US$50 billion credit line. This stands in stark contrast to capital inflow to equity funds in advanced countries.

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