Sometimes the difference between two words can be worth billions, or at least US$5 billion (Dh18.36bn) by one estimate. It has been almost a year since the Gulf equity markets came close to being upgraded from "frontier market" to "emerging market" status.
They fell short last year in the MSCI Barra review in June and the jury is still out on whether they have made enough improvement since then to merit the higher grade. This is about much more than semantics: it is a leap that could radically transform the image of regional markets and garner them increased attention from global investors. MSCI Barra is a New York investment research firm that creates indexes designed largely to guide international asset managers who need to assess investment and country-specific risks in equities. Last June, the firm ruled Qatar, Kuwait and the UAE did not yet qualify as emerging markets.
Yazan Abdeen, a fund manager at ING Investments in Dubai, says an upgrade from frontier to emerging market status could have attracted as much as $5bn in foreign investment to the UAE, Qatar and Kuwait. Of course, a lot has changed since MSCI Barra's latest review. The regional economy has largely stabilised with a steady oil prices and there has been a slight easing of the credit market. "The investment case is simple. The fact remains that these [Gulf] economies are emerging out of recession faster than the emerging market economies," Mr Abdeen says. But regional markets continue to trade at a discount of between 20 and 25 per cent to emerging markets, in part because the "frontier" label scares many investors.
"These valuations are based on no analyst upgrades for earnings growth in this region, whereas emerging markets have seen earnings upgrades consistently over the past nine months," says Sean Taylor, the investment director at GAM Dubai, which is part of the asset management firm GAM Holding. "We think that we might start to see a reversal of this." When evaluating frontier markets, MSCI looks at four criteria to determine if they should be upgraded: openness to foreign ownership; ease of capital flows; efficiency of the operational framework; and stability.
Analysts say local markets are making improvements in these areas, albeit at different rates. MSCI this year will review Qatar and the UAE for an upgrade. The Saudi bourse, the largest in the region, is not even rated a frontier market as it allows only indirect foreign ownership of stocks. MSCI Barra considers direct foreign ownership as essential for its rating. "The positive thing in Qatar is that the government seems determined to fulfil MSCI's criteria," says Rami Sidani, the head of investments for the MENA region at the global company Schroder Investment, which manages assets worth more than $250bn.
The UAE is next in line, analysts say, as soon as Dubai World's restructuring plan clears out and the regulators enforce more openness in the banking and property sectors. "I see the need for transparency in financial services and real estate," Mr Abdeen says. "These are the main sectors for investors. It has to be done before UAE can be an emerging market." The MSCI Frontier Markets Index gained 11.7 per cent last year, significantly trailing the global and emerging market indexes, which gained 30.8 and 79.0 per cent, respectively.
This year, the frontier markets index has risen 11.29 per cent, compared with 4.24 per cent for global markets and 3.06 per cent for emerging markets. Neil Wedlake, a strategist at Deutsche Bank, says equities in the UAE have immense upside potential. Mr Wedlake believes the Abu Dhabi Securities Market General Index alone could double in value by the end of this year, while Qatar equities could rise as much as 31 per cent. He says Dubai, Kuwait, Bahrain and Saudi Arabia all could see double-digit growth.
But for those rosy predictions to come to fruition, regional markets need to attract much more institutional investment, which is small at the moment. "Money always follows the value, even more so when the market is classified and rated internationally," Mr Abdeen says. "It will come to capitalise on cheaper valuation in frontier markets, but more so if the market is rated as emerging market." email@example.com