The reforms that have been carried out by the authorities to develop Kuwait’s market have been recognised by the international investor community via inclusions in influential emerging market indices. This should be of considerable benefit to the market, encouraging professionalisation and driving performance.
New Ranks
In the second half of 2018 Kuwait was included in the FTSE Emerging All Cap Index. A total of 12 Kuwaiti stocks were included for a combined weight of 0.5%, which had risen to 15 stocks for a weight of 0.91% by July 2019. Then, in December 2018 S&P Dow Jones announced that it would include Kuwait in its Global Broad Market Index with an emerging market classification from September 2019. In June 2019 MSCI announced that it would be reclassifying Kuwait from frontier to emerging market status effective June 2020. The MSCI Emerging Markets Index is tracked by more funds than any other index and is therefore likely to have the greatest impact on Kuwait’s capital markets.
MSCI made its upgrade conditional on two enhancements that would need to be in place by November 2019: technical trading updates to foreign accounts and order systems that would streamline processes for foreign investors. The Capital Markets Authority (CMA) said that it would be implementing these updates even before the MSCI announcement was made, and that they would be in place well before the November deadline. “The likelihood of the MSCI upgrade going ahead in 2020 is very high, with market participants seeing it as a done deal,” Wajih Al Boustany, a portfolio manager at NBK Capital, told OBG.
MSCI stated that Kuwait would have a weight in its Emerging Markets Index of about 0.5%, comprised nine stocks from various sectors: the National Bank of Kuwait, Kuwait Finance House, Boubyan Bank, Gulf Bank and Burgan Bank from the financial sector; Mobile Telecommunications from ICT; Agility in transport and logistics; holding firm Mabanee in real estate; and Boubyan Petrochemical Company in the industrial sector.
Outcomes
News of the upgrades has already had a positive impact on Kuwait’s stock market. In 2017 net foreign inflows to the local exchange were $200m, according to data from Boursa Kuwait. During the second half of 2018, after the announcement and implementation of the FTSE upgrade, foreign inflows spiked to $700m and rose again to $1.1bn in the first five months of 2019, compared to $200m in the same period of 2018. Inflows have further room for improvement if the external environment is favourable. “Inflows could have been even higher if it were not for heightened regional tensions,” Masud Ul Hassan Khalid, CFO at the Commercial Bank of Kuwait, told OBG.
Strong inflows from abroad are likely to continue. Analysts are in agreement that the passive inflows to the stock market as a result of the MSCI upgrade should total around $2.8bn, compared with around $1bn for the FTSE upgrade. “Around $3bn in passive inflows sounds about right to me, but we are expecting much more in active inflows – something like $10bn,” Saade Chami, group chief economist at the National Bank of Kuwait, told OBG. In June 2019 the CMA stated that Kuwait could attract inflows of up to $5bn from the MSCI upgrade, showing the variation in estimates. Unlike the consensus on passive inflows, there is much less agreement about the likely scale of actively managed funds, as their decisions are more discretionary than automatic. “Active inflows are hard to predict, as these require decent opportunities. However, if they come, they will come big,” said Al Boustany.
In Qatar the Institute of International Finance estimates that net inflows into its equity market rose from $600m to $2.5bn as a result of its upgrade to emerging market status in 2014, while in the UAE net inflows more than doubled to $2.1bn and in Saudi Arabia net inflows leapt from $100m in 2018 to over $10bn in the first half of 2019. If such sums of money end up flowing into Kuwait, it will be very positive for the market, lifting valuations, encouraging listings and boosting liquidity.
