Kuwait will now have to compete for the attention of money managers that invest in much bigger markets such as China, India, Brazil, Russia and neighbouring Saudi Arabia
MSCI will add Kuwait to its main index tracking stocks in emerging markets next year, an upgrade that has been priced in by investors on anticipation it will attract billions of dollars in investment.
The change will happen in June, 2020, the New York-based index compiler said in a statement on Tuesday. The Gulf country, whose $98 billion stock market is similar in size to those of New Zealand and Ireland, is currently the biggest member of the MSCI’s main frontier gauge.
The upgrade had been targeted by the local stock exchange and markets regulator as they modernised the trading infrastructure to attract local and foreign investors.
Kuwait will now have to compete for the attention of money managers that invest in much bigger markets such as China, India, Brazil, Russia and neighbouring Saudi Arabia, which joined the MSCI’s EM index earlier this year.
The upgrade, which follows a similar move by other compilers, “reflects the significant steps it has taken to modify its capital-markets infrastructure,” said Bassel Khatoun, managing director for Frontier and Middle East, North Africa at Franklin Templeton Emerging Markets Equity in Dubai. “With substantial reserves, low levels of debt and a stable banking sector, Kuwait’s fundamentals are attractive in an EM context.”
With Kuwait’s promotion, Vietnam is now the top contender for the biggest member of the frontier index, which includes countries where stock exchanges and currency markets are too small or underdeveloped to be classified as emerging markets.
The Asian market is currently on FTSE Russell’s list for a potential upgrade, but foreign ownership limits and other issues would prevent an imminent elevation by MSCI, according to Mohamad Al Hajj, an equities strategist at EFG-Hermes in Dubai.
Kuwait’s main index has advanced more than 20% this year, outperforming gauges tracking emerging and frontier markets as investors anticipated the MSCI decision.
National Bank of Kuwait SAK, Kuwait Finance House KSCP and Ahli United Bank BSC, which is going through a merger with KFH, are together expected to draw about $1.8 billion from passive investors following the upgrade, according to estimates by EFG-Hermes’ Al Hajj.
While there is enthusiasm and positive sentiment among Gulf investors and analysts, Kuwait’s market is valued at expensive levels considering the country’s growth prospects, and is “more complex to trade than other emerging markets,” said Asha Mehta, a senior portfolio manager at Acadian Asset Management LLC in Boston. “The overall market liquidity is low compared to emerging markets, and it is concentrated in the larger cap securities.”
MSCI also said Tuesday that it may launch a consultation process to reclassify Peru and Iceland as frontier markets.