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Editorial

Don’t shut out the Saudi market

The murder of journalist Jamal Khashoggi, allegedly by Saudi operatives, has shaken the investment world, though the victim had no obvious connection with it.

Many top investment executives showed their dismay and disgust by boycotting the Saudi investment showcase known as "Davos in the Desert." This was appropriate. Some have suggested going further to punish the Saudi regime, for example, by not investing in the country, and even by excluding stocks of its companies from indexes to which they were scheduled to be added in 2019.

It is not the responsibility of investment executives to punish the Saudi regime; it is their responsibility as fiduciaries to evaluate the country's suitability as a long-term investment.

If investment executives were to take actions against the regime because of the Khashoggi murder, then to be consistent they would have to take similar actions against other countries in similar situations — Russia, for example, where several outspoken opponents of the Putin regime, including at least one journalist, have been killed, and one former KGB agent living in exile in England was fatally poisoned with polonium.

The calls for boycott and exclusion are an emotional reaction to the horrible murder, but investment-related decisions by professionals should be based not on emotion but on careful analysis of what is best for the beneficiaries of the portfolios in the long run.

New York City Comptroller Scott M. Stringer urged the major index providers to bar Saudi Arabian stocks from relevant indexes. Before the furor over the Khashoggi murder, S&P Dow Jones had said it would change the classification to emerging market in March 2019. MSCI had announced it would add the nation to its emerging market index in June 2019, and FTSE planned to change the country to secondary emerging market status in March 2019.

The murder has not changed the economic fundamentals of Saudi Arabia, in particular its tremendous oil wealth and potential as it diversifies its economy, though the domestic political fallout might slow the current regime's plan for that.

Mr. Stringer, in letters to the index providers, expressed concern that the addition of Saudi Arabia would expose the $195 billion New York City Retirement Systems, which like many public employee pension funds are heavily indexed, to "investments out of the scope of suitable markets."

But his concern should apply to emerging market indexes in general. The MSCI Emerging Markets index, for example, includes Russia and China. China has been accused of holding up to 1 million Muslim Uighurs in re-education camps in Xinjiang province, and Russia forcibly annexed Crimea from Ukraine. Should these two nations be removed from the emerging markets indexes?

Institutional investors certainly should evaluate the prospects of economic development in Saudi Arabia in light of the political impact of the murder, but that will take time. A serious analysis cannot be rushed in a matter of weeks. It certainly cannot be done in the 22 days between Mr. Khashoggi's murder and Mr. Stringer's letters to the index providers.

It will take time to see if the murder will delay or derail Prince Mohammed Bin Salman's ambitious plans to remake the Saudi economy, plans that had encouraged many investors to consider investing there.

The likely outcome of those plans should determine the investment attractiveness of the Saudi market in the long run, and should guide investment decisions, not moral outrage.