The inclusion of two GCC countries, the UAE and Qatar, in the MSCI Emerging Markets Index is the most significant catalyst to promoting investment into the region for many years.
The MSCI Emerging Markets Index includes 21 markets and more than 800 listed companies representing about 13 per cent of world listed equity capitalisation and includes the likes of Samsung, China Mobile and Gazprom. On a global basis, it matters.
The GCC has had a good year so far, with the S&P GCC Index up about 16 per cent year-to-date, adding a net US$207 billion in capitalisation to a total of $1.4 trillion. Daily trading volumes were also up for the first four months of this year at an average of $3bn, up 50 per cent from December’s average, in anticipation of the MSCI upgrade.
Not only is this significant for the companies included in the index, but it will also provide uplift for other listed companies in the region and increase the positive sentiment to direct investment.
So far, so good; a rising tide lifts all boats. But what happens when the tide turns? How can this interest and these gains be consolidated?
The answer lies in three parts.
The first part is about liquidity and market structure. The ability to acquire and sell sufficient volumes of stock lies with capital market rules and with each company’s articles of association. Foreign ownership of equities is a highly regulated activity and is likely to remain so for the foreseeable future.
But what can companies themselves do to attract and retain the interest of global emerging market investors? The answer is in the investor relations function. Much has changed for the better in this space since the financial crisis, with significant inroads being made by organisations like the Middle East Investor Relations Society and the corporate governance experts Hawkamah.
Website content and the mechanics of disclosure have improved. Much has been made about what should be done and what can be done to improve information flow. But has the cultural shift occurred in the region that will enable companies to compete for capital with major players in global emerging markets?
Investors are in the business of buying the future. Past performance, however detailed its exposition, is only one factor to take into account when assessing growth prospects. The major shift that is required is enabling the market to value a business on its income statement rather than just its balance sheet. This means providing sufficient information on potential prospects to make an assessment of future growth.
The second major cultural shift is in exposing the management team to the scrutiny of investors, because it is they who have the most significant effect on the success of a business. In the GCC there has always been a reluctance to do this, as expat managers, of which there are many, are viewed as a transient and mobile commodity. But in reality they are probably no more so than managers in developed markets in terms of longevity.
Lastly and most importantly, the investor relations function needs to be integrated into the corporate governance structure so that directors and managers are aware of their responsibilities and the time and effort that is needed to make it work. Emerging market investors are keenly interested in corporate governance. A tick in this box helps to assess the risk premium they will apply when looking at a business.
Companies in the region do not need to, nor should they, imitate developed markets’ companies in cultural terms, but they do need to know who they are competing with and what investors expect to see if they are to capitalise on the opportunity the MSCI emerging markets index offers.
Toby Wilkinson has advised companies in the GCC on investor relations since 2006.
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