LONDON: Saudi stocks surged to their highest level in nearly three years on Tuesday, as investors continued to bet on the Kingdom’s equities being upgraded to emerging market status by widely tracked index providers. The Tadawul finished up 1.1 percent at 7,942.54, its highest close since August 2015, and the day before index provider FTSE Russell announces whether it will include Saudi Arabia in its emerging markets category. Such an inclusion is predicted to attract billions worth of passive inflows into the Middle East’s largest stock market, with a similar upgrade to emerging market status by rival index provider MSCI widely expected to be announced in June, and forecast to attract even more international funds. “If FTSE says yes (on Wednesday) then people will assume that MSCI will say yes in June, which is the reason the market’s been showing such strength recently,” said Mohammed Al-Hajj, vice president and head of MENA strategy at investment bank EFG Hermes. Such upgrades may attract up to $45 billion worth of inflows from foreign investors, Al-Hajj noted, with about $14 billion coming from passive inflows from international funds that allocate a set proportion of their portfolios to emerging markets. Saudi stocks missed out on an emerging market upgrade at FTSE’s last classification meeting in September, but are widely expected to make the cut on Wednesday. Such an upgrade is also expected to be announced in June by MSCI, which last month noted that the Kingdom had implemented “a number of positive market reforms” in the past 18 months, including relaxing foreign ownership restrictions on local stocks, reducing settlement times and introducing short selling. The growing anticipation of such upgrades, which would formally come into effect next year, has boosted Saudi equity values; after a flat 2017 the Tadawul is up 9.9 percent since the start of the year, making it the GCC’s best performing bourse. Banks in particular are set to benefit from any reclassification by MSCI and FTSE, said Al-Hajj, with lenders benefiting from rising interest rates in the Kingdom. The Saudi Arabian Monetary Authority last week raised its two key interest rates — its repo and reverse repo rates — by 25 basis points, after the rates fell below US rates in recent weeks. “The increases are credit positive for Saudi banks because they will prevent Saudi investors’ and depositors’ capital outflows and positively reflect the Saudi banking system’s stable liquidity conditions,” said Moody’s Investors Service in a comment note last week. After tightening lending conditions in 2015-16 following a fall in oil prices, liquidity conditions have begun to improve for Saudi banks, Moody’s noted, with credit contracting by 1 percent last year and public-sector deposits increasing 12 percent, underpinned by “improving oil prices and increasing international sovereign bond issuances.” Banks were among the big gainers on the Tadawul on Tuesday. Shares in NCB and Al-Rajhi Bank, the country’s two largest lenders by market capitalization, rose by 1.3 percent and 1.4 percent respectively. Insurance firms, health care providers and fast-moving consumer goods companies are also forecast to be key beneficiaries of emerging market upgrades, according to EFG Hermes, which rated the sectors as overweight last month.