(MENAFN- Gulf Times) FTSE Russell is set to announce over the weekend in the Middle East if it will add Saudi Arabia and Kuwait to its list of emerging markets in what could spur a surge in inflows to both markets and be a prelude to MSCI Inc inclusion next year. While recent market infrastructure improvements have been made in both countries, analysts and investors say Kuwait may be closer to being added than Saudi Arabia, which is aiming to modernise its market ahead of the sale of shares of state-controlled oil company Saudi Arabian Oil Co.
FTSE is expected to announce its country classification annual review on Friday after markets close in the US.
Saudi Arabia's main benchmark has gained just 1% this year, while Kuwait's has climbed 16%.
Below is a rundown of investor and analyst expectations:
Franklin Templeton Investments
The Saudi Capital Markets Authority and Tadawul stock exchange have already made substantial modifications to the Saudi Arabian equity market infrastructure and accessibility which position it well for inclusion, according to Bassel Khatoun, chief investment officer of Middle East North Africa equities in Dubai.
In Saudi Arabia, 'we believe that the FTSE criteria failings raised in the March review have now been addressed by the expansion of the settlement cycle from T+0 to T+2, the introduction of delivery versus payment (DvP) settlement provision, proper failed trade management, and the introduction of short-selling and securities borrowing and lending facilities. This is testament to the ambitious capital market reform agenda which has been successfully undertaken in Saudi Arabia over the past two years.
Initially, Saudi Arabia could constitute about 2.5% of FTSE secondary emerging index, resulting in passive fund flow of about $3bn, according to Khatoun. 'However, with the privatisation of Saudi Aramco, the most valuable company in the world, Saudi Arabia's weight in the index may increase to about 5% over time, he said. 'Kuwait's share of the index is likely to be closer to 0.5%, resulting in flows of $600mn.
EFG-Hermes
Both countries have 'a decent chance of being upgraded this Friday as on paper they both meet the minimum requirements, 'but we believe that Kuwait's chances are higher, says Mohamad al-Hajj, an equities strategist at the research arm of the investment bank in Dubai. EFG-Hermes remains overweight on Kuwait and underweight on Saudi Arabia.
He estimates that Saudi Arabia could attract close to $4.4bn in passive inflows, while Kuwait could add $822mn. A positive decision over the weekend would, in theory, bring Saudi Arabia closer to a potential MSCI inclusion next year, 'given that both index providers look at similar criteria for EM inclusion, al-Hajj said.
'We prefer to play the potential inclusion in Saudi Arabia through the banks, and we have Al Rajhi and Samba in our MENA Top 20 list. In Kuwait, NBK, Zain, and Humansoft are our top picks, he said.
Arqaam Capital
A FTSE inclusion of Saudi Arabia could be delayed beyond the September review as the index provider and its advisory councils 'may need more time to test the infrastructure changes, said Jaap Meijer, the head of research at Dubai-based investment bank, who sees Kuwait's chances as higher.
'The March country classification window remains an option, but FTSE would clarify its proposed timeline, either way, during the upcoming September review, Meijer said. 'Kuwait chances appear to be slightly better, but FTSE may need to test further as well. He estimates Kuwait could attract passive inflows of $700mn while Saudi Arabia's could rise as high as $6.5bn following an Aramco IPO.
An addition by FTSE over the weekend would suggest that international investors are comfortable enough with the current market infrastructure and could be followed by MSCI, Meijer said. 'However, we do note that the two index providers sometimes differ in their criteria and have seen discrepancies in what countries are classified under.
Shuaa Capital
Kuwait will likely be added as the country has addressed the major sticking points cited by FTSE last year, including seamless implementation of the settlement cycle and introduction of delivery versus payment process, says Ankit Gupta, vice president at Shuaa Investment Management in Dubai.
'Post-outperformance this year, up 18%, we are cautious on the Kuwait stock market and recommend selective addition to the market, with our preferred stock being Kuwait International Bank (KIB), Gupta said.
Saudi Arabia's inclusion may be delayed 'as we continue to hear investors' concerns on the settlement and pre-funding needs for the accounts, he said. 'Nonetheless, we remain optimistic that these concerns will be addressed in due course, with expected inclusion of KSA in FTSE EM and MSCI EM in 2018. 'Saudi Arabia is still in an off-benchmark position, and thus, we do not anticipate any major sell-off just in lieu of any market disappointment on an unfavourable FTSE announcement, Gupta said. He currently prefers increasing exposure to petrochemicals while remaining selective on further additions in the banking sector.
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