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ANALYSIS

MSCI upgrades put Gulf firmly on investment map

Dubai, June 12, 2013

Morgan Stanley Capital International's decision to raise the status of two Gulf stock markets in its investment indexes may buoy the entire region, helping in the long term to make it a major destination for global equity funds.

MSCI, which compiles indexes that are used as benchmarks by international fund managers, said on Tuesday it was upgrading the United Arab Emirates and Qatar to "emerging market" from "frontier market" status, after they undertook reforms to make foreign investment easier.

When the change takes effect next May, MSCI-based funds are expected to add stocks from those markets to their portfolios for the first time. The UAE will have a 0.40 percent weight in the MSCI Emerging Markets Index and Qatar, 0.45 percent.

The size of fund inflows directly caused by the upgrade is likely to be modest compared to the markets' size. Emad Mostaque, strategist at Noah Capital Markets, projected roughly $500 million of inflows for the UAE and a similar amount for Qatar. The UAE currently has a capitalisation of about $140 billion and Qatar, $110 billion.

But the benefits to the Gulf could go far beyond those numbers. By raising the region's profile, MSCI's decision may prompt many foreign investors to take a second look at it.

The presence of more foreign institutional investors could eventually change the tone of the Gulf's stock markets, making them less vulnerable to manipulation by local speculators.

It could also help some markets revive initial public offers of shares, which have languished since the global financial crisis, and prompt some exchanges to make further reforms to attract newly available money. Some analysts speculate that Saudi Arabia could open its market more fully to foreigners.

"The MSCI move is a major game changer for the region and is going to put the region on the world investment map," said Wafic Nsouli, head of institutional equity sales at Arqaam Capital in Dubai. "The long-term impact of the decision cannot be underestimated."

UAE and Qatar markets, which were already rising strongly this year because of healthy economies, climbed further to multi-year highs on Wednesday in response to the news. Dubai rose 1.6 percent, bringing its year-to-date gains to 48 percent, while Qatar climbed 1.8 percent.

NEGLECTED

The Gulf's status as a destination for equity investment has for many years lagged the growth of its oil wealth and economic power. Many foreign portfolio investors have shunned the region because of geopolitical tensions.

Others have been deterred by weak regulation of the markets, poor disclosure and nationalistic limits on foreign ownership; Saudi Arabia, for example, only allows foreigners to buy stocks indirectly through swap agreements or exchange-traded funds.

Perceptions have started to change over the past few years, however. The Gulf rode out the global financial crisis much more smoothly than many Western economies, causing some investors to see it as a safe haven.

Meanwhile, exchanges such as Dubai and Abu Dhabi have improved their disclosure and trading systems. Since the global crisis, Gulf states have been scrambling to expand their private sectors to reduce their vulnerability to the next plunge in oil prices; deepening capital markets is part of this effort.

One hope of many brokerages is that greater liquidity created by the arrival of more foreign funds will let the markets resume a steady stream of IPOs, which largely halted in the UAE after the global crisis shrank trading turnover.

The last new listing in Dubai occurred in early 2009 and in Abu Dhabi, late 2011. When Abu Dhabi healthcare firm Al Noor Hospitals announced this week that it would raise $320-390 million in an IPO, it chose London rather than its local market.

Qatar has plans to list some major government assets on its stock market, and Dubai has been considering such a move. Their new MSCI status would facilitate such listings.

REFORMS

There are also hopes that access to a larger pool of foreign funds could, in the long term, change the behaviour of both companies and exchanges.

Essa Kazim, chief executive of Dubai Financial Market, one of the emirate's three stock exchanges, said he expected more local companies to try to expand the number of their freely floated shares and improve their trading liquidity in order to be chosen by MSCI as constituents of its indexes.

MSCI's upgrade of Qatar was a surprise to many fund managers because its companies still maintain many restrictions on foreign ownership of their shares.

But days before MSCI's decision, the Qatar Exchange announced that some major companies had applied to increase the number of shares available to foreign investors.

The new limits are still not high - in many cases, they will be 25 percent of a company's market capitalisation, up from 25 percent of its free float - but MSCI said it was satisfied by Qatar's commitment to future change.

Rashed al Baloushi, chief executive of the Abu Dhabi Securities Market, said the emirate would continue reforming its market rules and infrastructure.

"It took us five to six years to be upgraded to emerging market status and to get to the next stage of developed market the criteria are higher, and that is more challenging," he said.

One of the biggest potential effects of the MSCI decision could be to spur the opening of the Saudi Arabian market, the Arab world's biggest, to direct investment by foreign institutions, if Riyadh believes it risks missing out on a surge of fund inflows into the Gulf.

"This puts additional pressure on Saudi Arabia to accelerate its Qualified Investor programme and we now believe this is likely over the summer," said Mostaque.

Saudi officials have been considering introducing the Qualified Investor programme, which would allow foreigners limited direct investment in Saudi shares, for years.

They have not announced a date for it, partly because they are wary of destabilising their market, but preparations are at an advanced stage so the opening could occur quickly if a decision is made. – Reuters




Tags: Qatar | UAE | Dubai | emerging markets | foreign investment | MSCI |

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