MARKETS MSCI decides to keep UAE and Qatar as frontier markets

Some investors are counting on an MSCI upgrade to help revatalise sleepy local markets

Zawya Dow Jones
June 22, 2012

Dubai: Index compiler MSCI late Wednesday said it decided to keep the UAE and Qatar as frontier markets, a blow to a small number of local investors who were hoping a promotion to emerging market classification would help boost trading activity.

As in December, when both markets were last passed over for an upgrade, MSCI cited concerns over trade settlement mechanisms in the UAE and Qatar’s failure to increase foreign ownership limits.

“The MSCI UAE Index meets all requirements besides specific market accessibility issues related to custody and clearing and settlement,” MSCI said in a statement on its website.

In terms of Qatar, MSCI noted that Qatari authorities haven’t yet addressed the specific issue around the very low foreign ownership limits.

Although expectations for a positive decision were somewhat modest this time around, some investors were counting on an MSCI upgrade to help revitalise sleepy local markets. Many foreign investors and fund managers closely track MSCI indexes as benchmarks for their investment strategies and an upgrade would likely trigger increased foreign fund inflows.

Shares listed on Dubai’s share market are up some 9 per cent so far this year, while Abu Dhabi’s main market has added close to 4 per cent. Qatar, the region’s only market to end in positive territory last year, has lost a touch over 5 per cent in value during 2012.

No big surprise

Akber Khan, director of asset management at Al Rayan Investment in Doha, said MSCI’s latest decision on the UAE and Qatar comes as no big surprise.

“If the MSCI was a central bank, they would upgrade both UAE and Qatar now because market participants had virtually no expectation of it happening,” he said. “But they aren’t, and according to their guidance Qatar still does not qualify because of the FOL (foreign ownership limit) issue. In December MSCI judged the UAE as having teething issues with DVP implementation. A further issue for the UAE could be volumes which have tracked back down in recent weeks,” Khan added.

MSCI said it could rank Saudi Arabia as an emerging market alongside countries such as Brazil and China, if the kingdom moves ahead with long-standing plans to open up its stock market to foreign investors.

That could vault Saudi Arabia above smaller regional markets such as the UAE and Qatar, which MSCI continues to rate as “frontier” markets in its global market indexes.

In its yearly market clarification review, released late Wednesday, MSCI noted that investors from outside the Gulf Cooperation Council (GCC), region currently have indirect access to the Saudi equity market through the use of swaps which for institutional investors may cause compliance issues.

Market accessibility

“The introduction of a new scheme allowing direct access for non GCC based investors to the Saudi equity market may result in MSCI considering the inclusion of Saudi Arabia in Frontier Markets or Emerging Markets, depending on the level of market accessibility,” MSCI said in a statement on its website.

With a market capitalisation of about $360 billion (Dh1.3 trillion), Saudi Arabia accounts for almost half of the Gulf region’s total value for listed companies, according to data. The benchmark Tadawul Index has added almost 7 per cent in value this year.

There has been speculation that a decision could be taken to open the Saudi market to foreign investment this year, though a Saudi official familiar with the discussions between the government and industry officials told Zaya Dow Jones in February that “nothing is set” on the timing of the market opening.

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