|01 October, 2018

Early mover advantage: Active investors move into Kuwait's stock market ahead of potential upgrade

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Stock trader Ali Fares smiles as he watches a computer screen at the Kuwait Stock Exchange in this file photo. Image for illustrative purposes only.

Stock trader Ali Fares smiles as he watches a computer screen at the Kuwait Stock Exchange in this file photo. Image for illustrative purposes only.

REUTERS/Stephanie McGehee

Kuwait's stock market has already attracted $400 million worth of inflows from active investors ahead of an upgrade to emerging market status by index compiler FTSE Russell and a potential upgrade by fellow index compiler MSCI, according to Bahrain-based investment bank SICO.

In a press release issued on Sunday, SICO said that the Kuwait market was up 12 percent in the year to date, and had increased in value by more than 10 percent since MSCI announced that it had placed Kuwait on a watchlist for a potential upgrade to emerging market status in June.

It said that market momentum had been "driven by foreign inflow into blue chip names" such as National Bank of Kuwait, logistics company Agility and telecoms company Zain.

Sico said that it expects the upgrade to FTSE Emerging market status, which was initially announced last year, could add around $900 million in passive foreign inflows by the end of this year. However, it said a potential upgrade by MSCI would have a bigger impact.

"Once Kuwait is included in the MSCI Emerging Markets Index, it will most likely see additional passive inflows of approximately USD 1.5 billion while active inflows could be much higher based on the experiences of other markets that were elevated to this status over the past 10 years,” said SICO's head of equities asset management, Shakeel Sarwar.

“However, it’s possible that the Kuwait market may remain on MSCI’s watch list for longer than anticipated before being upgraded. The UAE and Qatar, for example, were on the list for several years before they were finally upgraded in 2013," Sarwar added.

"Even if Kuwait’s transition doesn’t happen in 2019, it will still see MSCI-related foreign inflows of around USD 500 million because of its higher weightage in the MSCI frontier market following Argentina’s upgrade to an emerging market,” he said.

Sarwar said that the Kuwait stock market is currently trading at a price to earnings ratio of 13 times 2018 earnings, which he said was "conservative in light of the current macro environment and potential earnings growth of about 10 percent in 2019”.

In a note published on 22 September, National Bank of Kuwait said the country's stock market continued to outperform its peers in August.
Although the market fell by 0.6 percent during the month, this was better than the 2.2 percent decline in MSCI's GCC index.

It added that trading volumes dropped in August to 20 million Kuwait dinars ($65.8 million), which was lower than the 27 million dinars recorded in July but still well ahead of the volumes experienced earlier in the year.

Passive inflows as a result of the FTSE Russell market upgrade will occur in two tranches. The first began last week and the second will take place in December.

Further reading:
Weekly Q&A: "The consolidation among UAE banks, especially the Abu Dhabi-focused banks, makes this sector a top pick in our view."
Boursa Kuwait upgrades to emerging markets
GCC Equities Review: Funds to allocate more weight to Kuwait
After Saudi, Kuwait sees prospects of MSCI bourse upgrade improving
Kuwait seeks help for Boursa stake sale

(Writing by Michael Fahy; Editing by Shane McGinley)

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