Wednesday, Jun 22, 2011
(Recasts lede. Adds analyst comment in paragraphs 13-15.)
By Nikhil Lohade
Of ZAWYA DOW JONES
DUBAI (Zawya Dow Jones)--Index manager MSCI Inc. (MSCI) has postponed a decision on whether to upgrade the United Arab Emirates and Qatar to emerging market status, from frontier market, until December, as it needs more time to study whether both countries merit promotion.
"The 2011 review period for the potential reclassification of the MSCI Qatar Index and the MSCI UAE Index from Frontier Market to Emerging Market status has been extended to December 2011 in order to give additional time for market participants to assess the impact of the recent positive changes implemented in these two markets," MSCI said in a statement posted on its website late Tuesday.
"This review period extension will also provide more time to regulators and stock exchanges to address the remaining concerns raised by international institutional investors," MSCI added in the statement.
Investors in both the Arab Gulf stock markets were looking for an MSCI upgrade amid hopes that increased foreign fund inflows would reinvigorate the markets' fortunes, but stringent foreign ownership limits were seen as a potential deal breaker. Many foreign investors and fund managers closely track emerging markets.
MSCI noted that a potential reclassification for Qatar and the U.A.E. would be now implemented in the MSCI Indices at the earliest as part of the November 2012 Semi--Annual Index Review.
"Given that the new delivery versus payment (DvP) models were introduced only in May 2011, few market participants have had the opportunity to make a full assessment yet," the statement said.
U.A.E. and Qatar adopted the DvP settlement mechanism in April this year.
"The effectiveness of these new DvP models to guarantee the safeguarding of the investors' assets and to allow for the elimination of the dual account structure requirement still needs to be fully assessed by international institutional investors," MSCI said. "Early feedback from market participants highlights as one area of concern warranting further monitoring the handling of failed trades, which could prevent them from adopting the single account structure."
Moreover, international investors also continue to be concerned by the effect of stringent foreign ownership limits such as limited availability of shares to foreign investors, according to the statement.
"This point has been more strongly voiced for the Qatari market as large companies, such as Industries Qatar (IQCD.DO), have almost reached their foreign ownership limit and became quasi-uninvestable for foreign investors. Under current conditions, the MSCI Qatar Index would not qualify for Emerging Markets on this criterion," MSCI said.
An upgrade would definitely lift the profile of these markets and improve visibility, boosting benchmarked foreign inflows, analysts said.
Both the U.A.E. and Qatar have emerged as relative safe havens in the Middle East after the Arab spring toppled two regional governments earlier in the year and has several others fighting for survival.
Emad Mostaque, a Mena region strategist at Religare Capital Markets in London, said MSCI promotion for Qatar and the U.A.E. is more a question of when, rather than if it will happen.
"They'll get into the indexes eventually and offer an excellent risk/reward profile for investors at these levels as regional spending accelerates while the rest of the world slows down," said Mostaque.
"Investment from passive money might move things along at the margins, but its active investors and improvement in sentiment that will really get these markets moving," he added.
Dubai's market is down about 3% for the year, while Abu Dhabi's benchmark index is almost flat in the same period. Gas-rich Qatar's stocks have lost about 5% in 2011 so far, after adding some 25% last year.
-By Nikhil Lohade, Dow Jones Newswires, +9714 446 1694, nikhil.lohade@dowjones.com
Copyright (c) 2011 Dow Jones & Company, Inc.
(END) Dow Jones Newswires
22-06-11 0430GMT
