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Kuwait Wins MSCI Upgrade to Emerging Market Starting in 2020

MSCI will add Kuwait to its main index tracking stocks in emerging markets, an upgrade that has been priced in by investors.

Kuwait Wins MSCI Upgrade to Emerging Market Starting in 2020
Automobiles drive along a highway past city skyscrapers at night in Kuwait City, Kuwait. (Photographer: Tasneem Alsultan/Bloomberg)  

(Bloomberg) -- MSCI Inc. will add Kuwait to its main index tracking stocks in emerging markets next year, once some trading mechanisms are improved, in an upgrade that has been priced in by investors anticipating billions of dollars of inflows.

The change is due to 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 promotion had been targeted by the local stock exchange and markets regulator as they modernized 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 neighboring Saudi Arabia, which joined the MSCI’s EM index earlier this year.

The decision, which follows a similar move on Kuwait 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.”

In order for MSCI to proceed with the upgrade, the index compiler said Kuwait will have to make available so-called omnibus account structures and same national investor number (NIN) cross trades for international institutional investors before the end of November. The country’s capital markets regulator said earlier this month that both mechanisms will be in place no later than November. MSCI will communicate its final decision by the end of the year. An omnibus account allows several different foreign funds to execute trades through a single account.

Frontier Reshuffle

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.

‘More Flows’

Kuwait’s main index has advanced more than 20% this year, outperforming gauges tracking emerging and frontier markets as investors anticipated the MSCI decision. The gauge fell 0.6% on Wednesday, reversing an increase of as much as 0.4% earlier.

Officials at the capital markets regulator said in an interview they will speed up changes initially proposed for next year in order to meet MSCI’s deadline. They also said that they will soon present amendments for the regulation of market makers, and that a central clearing platform will be tested by the end of this year.

Kuwait Wins MSCI Upgrade to Emerging Market Starting in 2020

National Bank of Kuwait SAK, Kuwait Finance House KSCP and Ahli United Bank BSC, which is merging 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 start a consultation process to reclassify Peru and Iceland as frontier markets.

--With assistance from Fiona MacDonald.

To contact the reporter on this story: Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen, Blaise Robinson

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