MSCI to upgrade Kuwait indexes to emerging market status in 2020

The move, effective in May, is expected to bring $7.5bn in active investment flows to the market next year

Traders follows the stock market at Boursa Kuwait, the national stock market of Kuwait, on September 19, 2019 in Kuwait City. Saudi shares slumped at the start of trading on September 15, the first session after drone attacks on two major oil facilities knocked out more than half the OPEC kingpin's production. Other bourses in the Gulf also dropped. Dubai Financial Market was down 1.1 percent, Abu Dhabi and Qatar markets declined 0.4 percent each, while Kuwait shares sank 0.8 percent and Bahrain's bourse slid 0.9 percent. / AFP / Yasser Al-Zayyat

Global index provider MSCI will reclassify Kuwait indexes to emerging markets in 2020 as the oldest bourse in the Arabian Gulf meets all requirements for the status upgrade.

MSCI will make MSCI Kuwait Index a component of its MSCI Emerging Markets Index in a single move in May, as part of its 2020 Semi-Annual Index Review, the compiler said on Wednesday.

"We welcome the latest market accessibility enhancements introduced by the Kuwaiti authorities that now allow international institutional investor to benefit from omnibus account structures and same NIN [national investors number] cross-trade capabilities," MSCI’s global head of index solutions and chairman of the MSCI equity index committee, Sebastien Lieblich, said.  "Kuwait's addition adds further diversification to the MSCI Emerging Markets Index with an estimated weight of 0.69 per cent."

In June, MSCI, whose EM index is tracked by investors managing trillions of dollars in investments, tied Kuwait's upgrade to additional structural and regulatory changes. In October, the country's regulator Capital Market Authority amended some provisions of the executive bylaws and rules related to the implementation of omnibus accounts and same NIN cross trades, which won the MSCI reclassification.

Abu Dhabi Securities Exchange and the Dubai Financial Market in the UAE, along with Saudi and Qatar's market have gone through the same process. When the UAE underwent its upgrade process in 2013, the markets saw a significant equity price rise leading up to the implementation, rising as much as 44 per cent.

In Saudi Arabia, asset inflow into exchange-traded funds (ETFs) also rose ahead of the market upgrade, and a similar pattern is expected in Kuwait, according to HANetf, an independent ETF specialist company.

The inclusion of the Kuwait index is expected to attract an estimated $7.5 billion (Dh27.5bn) of inflows from active investors, according to HANetf. The expected capital of actively managed investments are on top of an estimated $2.6bn to $3bn of passive inflows forecast by the exchange, Boursa Kuwait.

The country's stock exchange has a market capitalisation of $31bn and the total flows as a percentage of the market cap will amount to about 33 per cent.

“The upgrade could have very positive implications for Kuwait equities,” said Abdullah Albusairi, a director of Kuwaiti asset management company KMEFIC. “The most likely effect will be passive inflows” into Kuwaiti equities when they are included in the emerging market gauge, he said.

“Looking at Saudi Arabia, for example, the market showed discernible positive price impacts on both the announcement of the inclusion as well as on implementation. Using the comparison, Kuwait might experience a large performance boost in the first half of 2020 due to buy side pressure,” he says.

Asset into Saudi ETFs started to pick up early this year, before Tadawul All Share's upgrade. They continued to rise from $250 million to nearly $5bn, almost 20 times as compared to 2018, he said.

Dubai investment bank Arqaam Capital “sees the index theme” dominating investments inflows into equities markets, led by Kuwait. It remains overweight on the Kuwait market in the first half of 2020, supported by index inclusion and stable macroeconomic environment in the country, it said in a report released earlier this week.

Earlier this year, Boursa Kuwait became the second Gulf Market after the DFM to sell its shares in a public offering. CMA's IPO of its 50 per cent stake in Boursa Kuwait Securities Company, generated strong investor interest with the deal oversubscribed by more than 8.5 times.

Boursa Kuwait's shares were offered to Kuwaiti nationals between October 1 and December 1, marking the second and final phase of the privatisation process of the exchange. The first phase took place this February.