Exclusive: S&P Dow Jones to launch three new Middle East indices
Index provider aims to tap into rising interest in passive investments into the region
Index provider S&P Dow Jones Indices plans to launch three new regional indexes by early 2018 a it continues its expansion in the Middle East and North Africa (Mena) and leverages the global and regional rise in passive investment inflows, its global chief executive.
The company plans to launch two high-yield indexes before the end of this year – the S&P Mena Bond and Sukuk High Yield Index, and the S&P Bond and Sukuk High Yield Index – said its global chief executive Alex Matturi.
The company, which is majority owned by S&P Global, plans to launch a third index, the S&P Pan-Arab Sharia Multi-Asset Class Index, in the first quarter of 2018, responding to growing demand for market benchmarking tools among banks, asset managers and sovereign wealth funds.
“A strategic goal for us is to be the local provider [of indexes] in the local market,” Mr Matturi said. “Here in the region it’s still primarily an active market but we are seeing a pick-up in terms of interest around ETFs [exchange traded funds] and index-based strategies because capital markets are becoming more developed here.”
Mena governments are working hard to develop their capital markets in line with international requirements, and more countries in the region are being included in global indexes, boosting the flow of passive investments. Investors who track indexes are typically known as passive investors because they do not pick stocks, as opposed to investors that pick stocks, called active investors.
Saudi Arabia, the Arab region’s biggest exchange with a market capitalisation of US$440 billion, is expected to be included in the widely-tracked MSCI Emerging Markets Index in 2019, as it eases rules for foreign investors. MSCI upgraded the UAE and Qatar to emerging markets status in 2014.
Last month, Saudi Arabia missed out on inclusion in the FTSE Russell Emerging Markets Index, but its neighbour Kuwait was upgraded, with the potential of attracting flows of US$822 million, analysts said at the time.
In the meantime, FTSE Russell launched the FTSE Saudi Arabia Inclusion Index Series on Sunday, intended to be used as a transitional tool to support growing demand ahead of the country’s full inclusion in the Emerging Market Index, which is expected next year.
Mr Matturi said interest in index-related services was rising. “Globally, there’s been a continued growth of index-based products – a movement from active management to index-type products,” he said. Nasdaq Dubai and MSCI’s licence agreement for the development of regional index derivatives this month is one such a product.
Many local players, in particular sovereign wealth funds, are accessing such products outside the region too, so S&P Dow Jones Indices aims to “expose global products into local markets,” the chief executive said.
He noted that two challenging features of Mena capital markets are volatility and lack of liquidity. To tackle this, the company launched the Pan-Arab High Dividend Low Volatility indices (one conventional and one Sharia-compliant version) last year.
“Stock baskets in the region often end up including the same names – those that are less volatile and most liquid,” Mr Matturi said. “Our two-factor indices place a liquidity filter on the selection process so you end up with the low volatility and high dividend stocks at the front. They have been very successful for us.”
The company is watching Saudi Arabia closely. “Right now the big story in the region is waiting for Saudi to open up,” he said. “Saudi is, what, 50-60 per cent of the market, so Vision 2030 is going to change the landscape and attract huge global flows to the region.”
In particular, the planned listing of a 5 per cent stake of state oil major Saudi Aramco, which is expected to raise as much as $100bn, will have an impact on all the other regional markets.
Saudi Arabia’s Tadawul exchange could reach the $1 trillion market capitalisation market by 2022 with the help of the Aramco listing, its chief executive Khalid Al Hussan told The National last week.
“Clearly it [the Aramco listing] will size out the Saudi market. There will have to be some sort of capping because although indices are built off of free flow you don’t want an index that’s dominated by one stock because then it’s useless,” Mr Matturi said.
Updated: October 29, 2017 09:15 PM