Emerging market indices set for shake-up following Saudi Aramco IPO

Saudi Arabia ETFs Aramco

Saudi Arabia’s decision to move forward with the initial public offering (IPO) of its massive state-run oil producer, Saudi Aramco, will be monitored very closely by investors in emerging market ETFs.

Earlier this month, Saudi Aramco received approval from the Kingdom’s regulators to float shares on the Tadawul Exchange next month.

The IPO is set to be the biggest in history and will lead to the creation of one of the world’s largest listed companies by valuation.

It is part of Saudi Crown Prince Mohammed bin Salman’s plan to open its capital markets to foreign investors.

The free float (percentage IPO) has not been confirmed yet, however, according to the New York Times, it could be around 3% of the company.

In a note to investors, HSBC calculated a $2trn valuation with a 3% free float would lead to Saudi Aramco making up 31.3% of the MSCI Saudi Capped 20/35 index and 1.1% of the MSCI Emerging Markets index.

Despite the high weighting, the IPO would not trigger any capping methodology as the maximum weighting for any single stocks is 35% while all other entities are constrained to a maximum of 20%.

HSBC is one of three ETF providers to offer exposure to Saudi Arabia in Europe through the HSBC MSCI Saudi Arabia 20/35 Capped UCITS ETF (HMSA). The other two are the Invesco MSCI Saudi Arabia UCITS ETF (MSAU) and the iShares MSCI Saudi Arabia Capped UCITS ETF (IKSA).

Warning buyers beware when investing in Saudi Arabia ETFs

Flows into Saudi Arabia ETFs have been very volatile this year. Following MSCI’s decision to upgrade Saudi Arabia to emerging market status IKSA and MSAU both collected over $1bn assets under management (AUM).

However, Saudi Arabia ETFs have all seen big outflows in the second half of the year after Fitch Ratings downgraded the Kingdom’s credit rating from ‘A+’ to ‘A’ in September amid geopolitical and military tensions and a “deterioration” in the country’s fiscal balance sheets.

MSCI Saudi Arabia Capped index weight MSCI Emerging Markets index weight
Free float (%) Valuation $1.5 trn Valuation $2 trn Free float (%) Valuation $1.5 trn Valuation $2 trn
1% 10.22% 13.17% 1% 0.27% 0.36%
2% 18.54% 23.28% 2% 0.53% 0.71%
3% 25.45% 31.28% 3% 0.80% 1.06%

Source: HSBC

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