In June 2018, the Saudi Arabian stock market was upgraded to Emerging Market status by MSCI, a provider of financial data and indices. The first set of Saudi stocks have now entered the firm’s widely followed Emerging Markets index, giving many investors around the world their first exposure to the country
As we commented in the Financial Times (content behind a paywall) at the time of last year’s decision, the inclusion of Saudi Arabia in emerging market indices will result in billions of dollars of inward investment as funds that follow MSCI indices buy Saudi companies for the first time. FTSE, another index provider, also began to include Saudi Arabia in its emerging market indices in March this year.
The inclusion of the Saudi Arabian market is unusual because of its size. Frontier markets (the classification below Emerging) are typically small and characterised by under-developed capital markets infrastructure. But the Saudi Arabian stock market has a total market capitalisation of $161 billion1, which is larger than that of Mexico and enough to place it in the top ten emerging market countries. After Saudi stocks are added to the MSCI indices, which will occur in two stages, they will account for approximately 2.9% of overall index exposure (based on March 29th 2019 values).
What is the Saudi Arabian market like?
Far from the vision of an economy dominated by oil, the Saudi Arabian stock market contains few companies focused on the energy sector. This is because most of the country’s valuable petrochemicals industry is owned by the state and will remain so until the government completes a much-delayed plan to privatise Saudi Aramco, thought to be the world’s largest energy company. Currently, the energy sector accounts for less than 1% of the MSCI Saudi Arabia index2.
Investors might be surprised to know that financial services account for nearly half the index. The materials sector, which includes companies involved in the mining and chemical (including petrochemical) industries, accounts for a significant 31%.
In the past, foreigners were only allowed to buy Saudi stocks through indirect methods. Although prospective buyers can now register as qualified foreign investors, some challenges remain concerning accessibility. Notably, the Saudi Arabian stock market follows common practice in the Gulf and is open from Sunday to Thursday, rather than Monday to Friday.
What does the inclusion mean for Nutmeg portfolios?
These changes mean Saudi Arabia will be included in the holdings of our broad emerging markets-focused ETFs, with the number of emerging markets countries included rising by two, from the current total of 24, when Argentina also joins the coveted emerging markets designation.
However, we expect that even when fully included, Saudi Arabia will constitute only a small portion of these funds, at less than 3% of the holdings. That means it will constitute an even smaller portion of our overall Nutmeg portfolios.
For example, our current largest exposure to the broad emerging markets ETF EMIM (iShares Core MSCI EM UCITS ETF) in any of our fully managed portfolios is approximately 7%3. In this context, Saudi Arabian companies would account for just 0.2% of the overall portfolio.
You can always see the geography and asset breakdown for your portfolio in our mobile app.
Will Saudi companies appear in SRI portfolios?
The possibility of Saudi Arabian equities appearing in socially responsible investment portfolios is controversial given the country’s record on human rights. At Nutmeg, we use environmental, social and governance (ESG) data, analytics and ratings from MSCI, an acknowledged expert in this field. Each of the companies listed in Saudi Arabia will be analysed individually, relative to their global peers. These ratings will be incorporated into the portfolio ratings that are published within our portfolio display.
Saudi listed companies will become eligible for inclusion in MSCI’s Socially Responsible indices that focus on emerging markets. However, a deeper analysis of the ratings of the Saudi-listed companies shows it will be difficult for them to make the grade as ‘best in class’ for each industry sector.
In fact, the Saudi stock market as a whole has a weighted average ESG score of just 2.8 out of 10, placing it in the lower scoring bands relative to global peers. This means we are unlikely to see these Saudi Arabian companies feature in our SRI portfolio at present but we will continue to monitor and update customers should this change.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
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James McManus
James joined Nutmeg in 2015 from Coutts & Co. He is responsible for leading the investment management, wealth services, and investment proposition teams at Nutmeg. An expert in exchange-traded funds (ETF), James is regularly quoted in the national and industry press on ETFs, investment funds and ESG investing, and was voted one of Private Asset Manager’s Top 40 under 40, five times between 2017-2021. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing.Other posts by James McManus