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Upgrade of MSCI Qatar and UAE indices to give access to $3 trillion funding

JEDDAH: Toward the end of November and at the beginning of December last year, the stocks on the Doha Securities Market (DSM) and Dubai Financial Market ( DFM ) witnessed a rally. Whilst the rally was partly due to the global trend in markets, fueled by the possibility of a concrete agreement in the EU, an additional factor came into play: The possible upgrade of the Morgan Stanley Capital International (MSCI) Qatar and UAE indices as part of the MSCI's Annual Market Classification Review, that would give them access to funding worth $3 trillion. However, on Dec. 14, the indices were denied entry into the emerging market category, just like earlier that year and in 2010 and 2009 and the potential reclassification of these indices has been postponed again to June 2012, according to a report "The Economic Effects of an Upgrade in the Financial Market Indices of Qatar & the UAE", prepared by Dana Al-Fakir, economist at KCIC, an investment firm specializing in emerging Asia investments.

After the MSCI decided to maintain the indices in the Frontier Market slot, the markets took a dip. Whilst the DSM suffered a minor dip, the DFM , which was more hopeful about the upgrade following through, plunged to its lowest in six weeks. A similar scenario ensued back in June of the same year. The effect of just the mere prospect of the markets joining the emerging index, illustrates the profound impact that an upgrade would have on both the Emirati and Qatari markets. The reasons for the upgrade delay this time around are almost an exact replica of those behind their denial back in June; the MSCI wants to give market players more time to fully evaluate the new delivery versus payment (DVP) models that were implemented early last year in Qatar, Dubai and Abu Dhabi. In the UAE, some glitches still need to be rectified via more regulations that will fully safeguard investor assets. In addition, foreign ownership of stocks in Qatar continues to be severely restricted, which was one of the reasons why they were less hopeful about the upgrade. Qatar needs to prop up its limits if it is to fulfill the MSCI's emerging markets prerequisite; whilst the UAE allows up to 49 percent foreign ownership of shares, Qatar only allows 25 percent, the report said.

The MSCI is a leader in the provision of global investment decision support tools and financial data. It classifies its 77 markets into one of 3 major categories: Frontier, Emerging or Developed. Investors decide how to allocate their cash based on these categories. Frontier markets (like the GCC) are typically associated with higher risks and are prone to higher volatility compared to emerging markets (like the BRIC economies) and developed markets (like the G8 economies). Thus risk-averse investors are more likely to invest in emerging or developed markets. A market's ascent to "emerging", followed by "developed" status is based on an evaluation of 18 measurements in four market accessibility criteria, which are: 1) openness to foreign ownership; 2) the ease of capital inflows/outflows; 3) the efficiency of the operational framework; and 4) the stability of the institutional framework.

If granted entry, the KCIC report said, the Qatar and UAE MSCI indices will join the ranks of Brazil, China, India and Turkey and lure in a large pool of investors tracking the MSCI emerging index. In the long-term, this could secure the two countries another source of major capital inflows, as opposed to primarily coming from finite sources such as oil and natural gas. Although the UAE and Qatari stocks are likely to occupy only a small percentage of the benchmark, which already has heavy weights reserved for the BRIC economies and South Korea, it will still be exposed to investors with about $3 trillion worth of assets that could ultimately send their market fortunes soaring. What's more, their reclassification decision will come at a time when the MSCI will also revisit the status of two Asian economies, Taiwan and South Korea, which together represent almost 25 percent of the MSCI emerging index.

It is likely that one or both of these markets will be upgraded from emerging to developed market status, which will in-turn trigger a substantial sell-off from emerging markets-focused exchange-traded funds (ETFs) and mutual funds as they engage in a substantial reshuffling of their investments.

Thus, the timing of the decision could not be any better for both Qatar and the UAE. If their entry timing does coincide with Taiwan's and South Korea's exit from the emerging markets index, then they could see part of that reshuffled money ending up in their markets. So if Qatar and the UAE do increase their chances of an upgrade, expect bigger rallies in their respective markets ahead of the next upgrade classification. The entry of Qatar and the UAE into the emerging bourse will undeniably give local markets a well-needed boost and it will only be a matter of time before the rest of the GCC countries follow suit, the KCIC report said.

© Arab News 2012