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Saudi Arabian leaders made a dramatic decision overnight: the next king will be the son of the king, not his cousin the now-former crown prince.

And investors are watching the Saudi market not just because of geopolitics. Overnight, indexing giant MSCI said it will formally consider the Saudi Arabian stock market for inclusion in its emerging market index, skipping frontier status. The iShares MSCI Saudi Arabia Capped exchange-traded fund (KSA), which is small with net assets of $11 million, jumped more than 6% in early trading Wednesday.

The iShares MSCI Emerging Markets ETF (EEM) is up 0.5% this morning, and the iShares MSCI Frontier 100 ETF (FM) is down 1.5%. The WisdomTree Middle East Dividend Fund (GULF) is down 0.5%.

King Salman, 81, announced that his 31-year-old son Mohammed bin Salman, who as deputy crown prince has been defense minister, and trumpeted a plan to diversify the economy by 2030 and reduce the kingdom's oil dependence, is now crown prince and heir apparent. The king removed the previous crown prince, Mohammed bin Nayef, 57. Mohammed bin Salman, Saudi Arabia's new crown prince. Photographer: Simon Dawson/Bloomberg

The king took the throne in January 2015 when the previous king died, and his age poses a risk with massive economic, financial and geopolitical tasks ahead. The new prince could be named king within the year, said John Sfakianakis, a strategist based in Saudi Arabia, in a Bloomberg Radio interview Wednesday. Low oil prices and social welfare mean deficit spending. At the same time, defense costs are significant. Saudi tensions with Iran are mounting, with the two sides' differing brands of Islam at odds in the Middle East including opposite sides in the war in Syria. Saudi Arabia's military campaign in Yemen has been expensive and deadly. Saudi opposition to the government in Qatar -- a strategically important piece of land surrounded by Saudi territory and ongoing battles against terrorism also weigh on the kingdom's economy.

Renaissance Capital's Daniel Salter and Vikram Lopez note this morning that foreign ownership of Saudi equities is a low 4%. MSCI said it would add Saudi Arabia to its annual review for possible inclusion in the MSCI Emerging Markets Index, which could happen by late May 2019. Before then the Saudis could sell shares in the government-controlled oil and energy giant Aramco. They add:

"Using the provisional list of constituents and latest prices, we estimate that Saudi Arabia could have a weight of 2.5% in MSCI EM, making it the ninth-largest country in the index ... We estimate that inclusion in EM would trigger at least $2.3 billion (or seven days of trading for the basket of stocks that are expected to make the cut) of inflows from passive funds (based on c. $94 billion of EM-dedicated passive assets under management), with a further $9.3 billion of inflows should active funds move to neutral (or 26 days of trading) – see Figure 3 for more details. Currently, active global emerging markets (GEM) funds in aggregate hold a small (0.15%) amount of Saudi Arabia in their portfolios, down from a peak of 0.3% in August 2015."

RBC Capital Markets'commodities Strategist Helima Croft wrote the following on Saudi succession:

" ... The key question is what comes next in this quest to counter Iranian influence. Is the Qatar blockade simply the opening act in a broader anti-Iranian offensive? Having President Donald Trump in the White House probably means that "MBS" [Crown Prince Mohammad bin Salman, as he is known] will encounter minimal push-back from Washington and a far freer hand to police his neighborhood. Hence we contend that region could witness more near-term volatility and heightened risk of military confrontation. The political risk premium may therefore be set to stage a comeback. ...

The state-owned al-Arabiya news channel reports that the allegiance council voted to support the switch by a vote of 31 out of 34. We see the move as having no effect on oil policy and the leadership’s willingness to pilot the OPEC production cuts. In fact we see the ascension of MBS as deepening the drive to implement the ambitious Vision 2030 economic transformation plan designed to shrink the state and reduce its dependence on oil revenue. Hence we contend that it will be full steam ahead with the planned partial listing of Saudi Aramco and the creation of the country’s first serious sovereign wealth fund with the proceeds of the sale. As the plan threatens to deconstruct the prevailing patronage system it has been controversial with a segment of the royal establishment. Those dissenting voices will likely be silenced for now. There will also likely be additional momentum to provide more social freedom for the 70 percent of Saudis under the age of 30, including greater rights for women. Hence the religious authorities could see their power further eroded under MBS. Of course if the young prince fails to deliver on the promise to create new private sector jobs for young Saudis, he could find himself facing a popular backlash...."
 3 Experts On What New Saudi Crown Prince Means For Investors


