Hitting the jackpot

MSCI’s decision to upgrade the UAE and Qatar to emerging markets status could unlock billions of dollars worth of new investment for both Gulf countries

Morgan Stanley Capital International (MSCI) upgraded the ratings of UAE and Qatar on its equities index to emerging markets status at the fifth time of asking on June 11 .

MSCI’s index, which is followed by investors managing $7 trillion in assets, had become an annual source of frustration for both Gulf countries. However, this month’s decision to promote them from their current frontier markets tag could unlock billions of new investment into their stock markets.

“For both markets it’s very, very positive,” says Amer Khan, a fund manager at Dubai-based investment bank Shuaa Capital. “For the UAE we believed this was their best shot of getting into the emerging markets index out of all the previous years. The [UAE markets] regulator had made it pretty clear that it was important and they would do everything they could to address all of the requirements.”

In its 2013 Annual Market Classification Review, MSCI highlighted the improvements that exchanges and regulators in both markets have made over the last few months to accommodate investors.

For the UAE, the report underlined the implementation in May of a delivery-versus-payment (DVP) model and the provision of more protection to buyers in the event of false trades. MSCI said that this has mitigated fears over safekeeping of investors’ assets and encouraged international buyers to move away from a dual-account structure, whereby investors transfer shares from one account to the other prior to trading.

“If you look at the rationale for why the UAE wasn’t upgraded twelve months ago, it was clearly referenced that that was an issue and the reliance on the dual account structure — that was a problem,” says Peter Gotke, managing director and head of GCC depositary receipts at BNY Mellon. “It’s been put in place recently and it’s got to the point that investors are comfortable that it’s working and sustainable.”

For Qatar though, the decision to upgrade to emerging-market status was a tad more unexpected. In its annual review, MSCI also praised the implementation of DVP and a false-trade mechanism, but expressed concerns over the low level of foreign ownership in stocks permitted by authorities. “Foreign ownership limits in Qatar remain low by emerging market standards and the Qatari authorities should actively continue to increase them above 25 percent in order to mitigate potential issues arising from increasing foreign capital inflows,” it read.

“Qatar is a bigger surprise, and I think the consensus in the market was that they wouldn’t make it, and that consensus wasn’t ill-informed or anything, but it was based on the factual progress Qatar had made on the requirements that MSCI had repeatedly laid out for them in the previous reviews,” says Shuaa’s Khan, in reference to the foreign ownership requirements set out by MSCI. “But it’s a positive surprise — obviously it’s not been a deal breaker.”

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