Second, Saudi’s equity markets have historically exhibited an oil “beta,” with even non-petroleum related firms seeing their stock price rise and fall in response to similar movements in the price of crude oil. This primarily reflects the degree to which the Saudi economy is primarily reliant on its extractive industries, or government revenues generated by oil sales.

Third, because foreign nationals were generally not allowed to directly invest in Saudi equities, MSCI does not include Saudi Arabia in either its Emerging Markets Index or Frontier Markets Index. The process for the inclusion of Saudi Arabia in MSCI’s Emerging Markets Index is a purposefully drawn out affair while MSCI judges the efficacy of the Saudi QFI program. That means 2017 is the earliest most passive emerging market investors will see Saudi included in their portfolios. It's important that asset managers understand these processes and their implications in portfolio construction.

Saudi Arabia has the potential to become a large and liquid constituent of the emerging market equity universe. For active managers, the country represents a deep and broad market for them to apply their alpha-generation techniques. For passive investors, it could potentially be a large and diversifying part of an index-based portfolio in two years’ time. In both cases, we expect to see Saudi Arabia gain importance in an investor’s emerging markets portfolios.

Timothy Atwill is head of investment strategy at Parametric Portfolio Associates.

 

 

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