MSCI has upgraded the UAE and Qatar to "emerging market" status after six years of efforts by exchange officials in both countries to win the confidence of global investors.
The MSCI Emerging Markets Index, which tracks US$7.3 trillion of equities around the world, is considered the A-list of growth markets and includes countries such as China, Brazil and India.
The UAE and Qatar's upgrade to membership in the index is expected to take effect around May 31, 2014.
The move is a major sign of approval from institutional investors for the countries' stock markets, and is expected to attract more stable sources of capital to local equities.
"International institutional investors recognised the improvements made by the Emirati regulator (Securities and Commodities Authority), the Dubai Financial Market and the Abu Dhabi Securities Exchange," MSCI said shortly after announcing the results of its annual review at 1am Wednesday UAE time.
"The majority of market participants have expressed no major concerns over the safekeeping of investors’ assets," MSCI added.
Qatar would account for 0.45 per cent of the weighting of the Emerging Markets index, with the UAE accounting for 0.4 per cent, Remy Briand, MSCI's managing director and global head of index research, said on a conference call with reporters after the announcement.
"There has been a lot of improvement over the last 12 months regarding operational efficiency on both markets," he said. "That has warranted the upgrade to 'emerging markets'.
But the night brought bad news for Greece, which has been reclassified as an "emerging market" from "developed market" status following the country's economic collapse.
Morocco was also downgraded from "emerging" to "frontier" market as a result of the drying up of liquidity on the country's stock exchange.
MSCI said that worsening market conditionings in Egypt were also creating concern.
"MSCI also announced that it is closely monitoring the situation in Egypt, in particular the negative developments in the foreign exchange market," the index provider said. "MSCI may launch a public consultation on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation to worsen in the coming months."
The UAE and Qatar first sought index inclusion in the emerging markets index 2008 and had been denied entry to the grouping five times since the first review in 2009. Both had been designated as "frontier markets".
In a note to clients last month, HSBC said that an upgrade to "emerging market" status could bring more than $430 million flowing into Qatar and around $370m into the UAE.
MSCI Emerging Markets is the most widely-used index by investors in developing markets. Because much of the funds tracking the index are passive investors, inclusion in the index compels additional capital to be funnelled to the markets it covers.
The Dubai Financial Market General Index has soared 45.3 per cent so far this year, while the Abu Dhabi Securities Exchange General Index has increased 35.5 per cent. The two are among the five top-performing stock exchanges this year.
Banks said institutional investors such as pension funds and insurance companies had taken a larger stake in the UAE's equity markets during the bull run.
"It has been a long journey, but we've finally arrived", said Georges Elhedery, HSBC's Head of Global Markets MENA. "Today's decision firmly establishes the region on the emerging markets growth map in the minds of global institutional investors."
Sam Vecht, BlackRock’s head of the emerging markets specialist team and portfolio manager of the Frontiers Investment Trust, said: “The MSCI decision to upgrade Qatar and the UAE from frontier markets to emerging markets on Tuesday 11 June 2013, with effect May 2014, reflects a growing realisation of how far these economies and their financial markets have developed in recent years.
“While we welcome the move, it is unlikely to have any significant near-term impact on how we manage our client portfolios. We have been broadly positive on both of these countries for the last two years as the combination of economic restructuring post financial crisis, strong earnings growth, depressed valuations, and high dividend yields offers an attractive proposition.
“Morocco will move from the Emerging Markets Index to the Frontier benchmark in November 2013. We have extensive investment experience in Moroccan equities and believe that the market is looking increasingly attractive having underperformed in recent years. The point at which many others are selling is often a good time to buy.
“We continue to believe that Frontier Markets with their strong GDP growth, positive demographic profile, low debt burden and relatively low correlation to developed markets are a great place to invest for those who have both a long term horizon and wish to see capital and income growth.”"