Saudi Equities — Five-Year Milestone and the Road Ahead
Key findings
- Since its inclusion in the MSCI Emerging Markets Index in 2019, Saudi Arabia’s equity market has expanded to offer investors more-diversified sector exposures.
- Market participation by foreign investors has increased more than fourfold since 2018 as regulatory controls impacting them have been relaxed.
- Saudi Vision 2030 could be a catalyst for economic expansion, but challenges remain as the kingdom strives to shift away from its historical reliance on oil.
A main plank in Saudi Vision 2030 is the development of the kingdom's financial sector. Related to the goal of diversifying and strengthening this sector of the economy is the goal of increasing foreign investors' participation in the Saudi capital markets.
In this blog post, we review how Saudi Arabia's equity market has changed over the last five years after its inclusion in the MSCI Emerging Markets (EM) Index and what the future may look like as investors — especially foreign investors — assess the opportunities, risks and challenges the market presents.
Relative outperformance after inclusion in the MSCI EM Index
After consulting with institutions that invest globally, MSCI chose to include Saudi Arabia in the MSCI Emerging Markets Index (and, hence, the MSCI ACWI Index) in two phases at the May 2019 and August 2019 index reviews. Our decision followed several regulatory and operational enhancements in Saudi Arabia's equity market that improved market access for such investors.
Since May 2019, the MSCI Saudi Arabia and MSCI Tadawul 30 Indexes and the MSCI Saudi Arabia Investable Market Index (IMI) have outperformed the MSCI Emerging Markets IMI. The MSCI Tadawul 30 Index, jointly launched by MSCI and the Saudi Stock Exchange Co. (Tadawul), includes the top 30 stocks listed in the Saudi equity market, based on free-float-adjusted market capitalization and screened for liquidity and international investability.
All three MSCI Saudi Arabia indexes outperformed the MSCI EM IMI since May 2019
Data period from May 31, 2019, through May 31, 2024. Returns are gross in USD.
An expanded opportunity set attracted foreign investors
The MSCI Saudi Arabia IMI has increased its constituents to 123 securities, as of June 3, 2024 (the latest rebalance date), from 70 on June 3, 2019. Diversification of the companies in the index has also improved slightly over the last five years. For example, initially, the index had no information technology (IT) companies, but now has four. The two largest sectors remain financials and materials.[1] Although the listing of companies such as Saudi Aramco and Saudi Arabian Refineries Company have expanded the index's exposure to energy, foreign ownership is still low in this strategic sector.
Sector diversification — some improvement, but room for more
The bars show the sector's weight in the MSCI Saudi Arabia IMI on June 3, 2019, and June 3, 2024, the latest index rebalance date.
Saudi Arabia was sixth among the EM by free-float-adjusted market capitalization as of June 3, 2024 (4% of the MSCI Emerging Markets Index), up from 1% on June 3, 2019, when it was the 11th largest EM equity market. In the hypothetical scenario of full market capitalization, Saudi Arabia would be the third-largest EM country.
Saudi Arabia ranked sixth in EM by free-float-adjusted market capitalization
The bars show the top 10 EM equity markets by free-float-adjusted market capitalization on June 3, 2019, and June 3, 2024.
A key development over the last five years has been the increased ownership by foreign investors in the Saudi capital markets, which had more than quadrupled at the end of Q3 2023 (USD 97.5 billion) from year-end 2018 (USD 23.1billion).[2] Direct investment in the capital markets was first allowed in June 2015 with the establishment of the Qualified Foreign Investor program. Since then, the Capital Market Authority has made efforts to attract foreign investors and diversify the previously domestic orientation of the kingdom's capital markets.[3]
Despite a broader opportunity set, foreign investors' access is still limited by ownership restrictions. Based on the 2024 MSCI Global Market Accessibility Review, listed companies are generally subject to a foreign ownership limit of 49% and a few companies are fully closed to foreign investors. Other challenges to wider market participation include that some investment information is only available in Arabic and pre- and post-trade processes can be impacted by inefficiencies in local custody workflows.
Catalysts for change: Vision 2030 and the Saudi Green Initiative
The ambitious programs of Vision 2030 have the potential to reshape the future trajectory of Saudi Arabia's economy. This wide-ranging plan aims to boost development across numerous industries, including renewable energy, technology, tourism, health care and infrastructure, as the kingdom plans to invest more than USD 7.1 trillion in its economy over the next 10 years.[4]
As part of the Saudi Green Initiative, the kingdom adopted a 2030 emissions-reduction target, an important step in helping achieve global climate targets. As of June 3, 2024, across the 23 developed and 24 emerging country and regional markets for which MSCI has indexes, the MSCI Saudi Arabia IMI was the most carbon-intensive based on revenues and ranked 12th based on enterprise value including cash (EVIC).[5] Efforts are underway to reduce the economy's reliance on oil. GDP growth from non-oil segments was 4.6% in 2023 (compared to a contraction in overall GDP of 0.9%),[6] spurred by demand in hospitality and tourism as well as manufacturing, real estate and construction.[7]
The emissions intensity (Scope 1 + 2 emissions/EVIC) of the MSCI Saudi Arabia IMI has not been reduced over the last five years, however, weighted-average green revenues have increased. As of May 31, 2024, two companies in the MSCI Saudi Arabia IMI derived more than 20% of their revenues from clean technologies.
Saudi carbon footprint was flat, while green revenues moved higher
Data shown at month-ends May 2019 to April 2024. Carbon intensity (CI) is calculated as the weighted-average t CO2e/USD million EVIC (Scope 1 + 2), and green revenues are calculated as the weighted average of cumulative revenue (%) from the six clean-tech themes (alternative energy, energy efficiency, sustainable water, green building, pollution prevention and sustainable agriculture). We compare the MSCI Saudi Arabia IMI, MSCI Emerging Markets IMI and MSCI GCC Countries IMI. The Gulf Cooperation Council (GCC) countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
Visions for the future designed to encourage foreign investment
Since its inclusion in the MSCI Emerging Markets Index five years ago, Saudi Arabia's equity opportunity set has expanded, in terms of both the number of securities in the MSCI Saudi Arabia IMI and the Saudi market share in the MSCI Emerging Markets Index.
Initiatives adopted by the Saudi government indicate a broader welcome to foreign investors and an interest in combating global climate change, although progress in the latter effort has been mixed. While the carbon intensity of the MSCI Saudi Arabia IMI did not decrease over the last five years, its green revenues were higher.
Greater progress has been made in attracting foreign investors. Both Vision 2030 and the Green Initiative have the potential to build on the progress made to date in Saudi equities.
The author would like to thank Rahul Suresh Kumar and Venkat Raghavan Cheerla for their contributions to this blog post.
1 Sectors are defined by the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.2 “Capital Market Overview Report Q3 2023,” Saudi Exchange, October 2023.3 “CMA Further Expands Foreign Investors' Access to Saudi Capital Market,” Capital Market Authority, Jan. 9, 2018.4 “Saudi Launches Its National Investment Strategy,” Vision 2030.gov.sa, accessed June 11, 2024.5 Both revenues and EVIC were calculated using Scope 1 + 2 emissions.6 Alexander Cornwell and Pesha Magid, “Saudi Arabia sees medium-term non-oil growth at over 5%, below previous estimate,” Reuters, Feb. 19, 2024.7 Luke Aplin, “Saudi Arabia Hits Milestone in Shift Away from Oil Economy,” Global Finance, April 2, 2024.
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