The UAE and Qatar upgrade to MSCI emerging status from the current frontier-market status will have a profound effect on the local equity markets.
UAE and MSCI: A well-deserved inclusion worth celebrating
The UAE and Qatar upgrade to MSCI emerging status from the current frontier-market status will have a profound effect on the local equity markets. It is estimated that globally US$800 billion follows the MSCI Emerging Market Index with $100bn in passive money alone.
Many investors and stakeholders in the GCC equity markets who had been anxiously awaiting the announcement from MSCI, a global provider of indexes, can now celebrate a well-deserved inclusion.
The upgrade shows that MSCI acknowledges the efforts both exchanges have made in recent months, indicating their willingness to meet the inclusion criteria and consider feedback from the largest investors around the globe. In our opinion this is a positive announcement for the UAE and Qatar as the market had been assigning a medium to low probability of upgrade this year.
Given that income per capita for the UAE and Qatar are among the highest in the world, some would argue those markets should automatically be classified as emerging market status; however, both are still relatively new, characterised by lower liquidity, lower equity market capitalisations, less diversified sector representation and, until recently, lagged behind in terms of their operational frameworks.
One has to acknowledge the phenomenal development of both markets in a short period of time and a great degree of credit goes to the Abu Dhabi Securities Exchange, Dubai Financial Market and Securities and Commodities Authority for having the drive and willingness to adapt. The introduction of the delivery-versus-payment system and other operational enhancements have better aligned the exchanges with international best practices followed by world-class exchanges.
The path of development is expected to continue at an even faster pace, as exchanges are given incentives to continue developments that meet the best interests of investors, such as raising ownership limits on foreigners, an investor concern highlighted by MSCI.
The MSCI emerging markets index was launched in the mid-1980s and has over the years grown in importance to investors around the world. At inception, the index represented about 1 per cent of the MSCI all-country world index, a percentage that grew to 14 by this year, indicating a radical change in opportunities available to investors seeking to diversify globally.
It is estimated that about US$100 billion is invested in exchange-traded funds (ETFs) tracking the MSCI emerging market index.
Following the inclusion in May next year, managers of ETFs will rebalance their portfolios in the proportions of the new index weights, automatically benefiting the UAE and Qatar exchanges through fund inflows.In addition to the benefit they gain from passive fund flows, global fund managers and major research and brokerage firms will work to make the UAE and Qatar accessible to their wide client base of institutional and high net-worth individuals.
The status upgrade for the UAE and Qatar is expected to have a positive effect on market depth and velocity and may cause a shift in the dominance of investors from retail to institutional, which typically results in more liquid markets coupled with better informed and longer-term investment decisions.
Saleem Khokhar is the head of equities at National Bank of Abu Dhabi Asset Management