MSCI upgrade for UAE can channel $50bn into region

An upgrade from "frontier market" status to "emerging market" for the UAE by index compiler Morgan Stanley Capital International (MSCI) has the potential to channel up to $50 billion (Dh183.62bn) worth of foreign capital into the region, analysts said.

MSCI will announce today whether the UAE, Qatar and Kuwait will be re-classified as emerging markets and if South Korea gets "developed market" status, following a consultation that began a year ago. However, any re-classification will take effect only in November.

Upgrading the three Gulf markets to "emerging" status will include them in the MSCI Emerging Markets index, a benchmark widely tracked by institutional fund managers with a long-term investment horizon, unlike the current situation in which fund flows are characterised by short-term opportunistic hedge-fund money.

If the UAE, Kuwait, and Qatar are included in the MSCI EM index, about $50bn of net inflow could find its way into these markets from emerging market funds, assuming a neutral weighting for the region, Shuaa Capital said in a report.

"It's a chicken-and-egg situation," said one stock analyst. "Stock markets in the region can benefit from stable and researched fund flows from the outside world. But these cannot come in because most companies have hit their foreign ownership limits. Foreign capital wants access to this region because of the economic strength, but needs to know that these markets are tracked by a respected index, which will not happen until restrictions are eased."

Gulf equity markets have managed to develop significant depth and attracted global attention over the past two years driven by economic growth reflected in the strong fundamentals of regionally listed companies. In an increasingly value-strapped global equity situation, GCC markets have seen large inflows from foreign money managers. The exclusion of Gulf markets from the MSCI EM index has kept them off the radar screen of most emerging market funds.

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