TALKING HEADS: Emerging ambitions

Funds Global asks senior executives in the Middle East whether the political unrest will hinder the UAE and Qatar’s prospects of inclusion in the MSCI Emerging Markets Index.
We also ask what impact inclusion would have.

The political unrest in North Africa and the Middle East is not expected to have an effect on the United Arab Emirates and Qatar’s chances of making it to the MSCI Emerging Markets Index this year. We saw the revolution first taking place in Egypt and most probably this will not affect its emerging market status. Furthermore, inclusion in the index is based on various factors like the settlement systems, foreign ownership, and some discretion from the MSCI itself. I believe that both markets achieved several milestones toward their inclusion, but the foreign ownership issue is yet to be properly addressed, as the Doha stock exchange announced earlier last month that there will be no changes to the foreign ownership limits this year, and the UAE did not do any changes to rectify this matter as well. Therefore, I believe that at this stage it will be hard to tell whether they will be included or not this year.


Upgrading UAE and Qatar to an emerging market status will boost sentiment across the region as both markets will not be considered as risky as the so-called frontier markets anymore. In addition, the upgrade is expected to attract at least an extra $3.8bn (€2.7bn) between the two markets from global emerging markets fund managers over a period of five to eight months.

Risk, whether caused by political, economic, financial or environmental factors, is always present in emerging markets. We have seen similar risks appear in developed markets such as the United States, Europe and Japan. Investor reaction to new shocks or risks is always the same: head for the exit first and ask questions later. The Middle East and North Africa region is no different. Although this may affect the prospects for index inclusion, we would expect global investors to re-focus on the larger picture such as the long-term wealth creation in the Gulf Co-operation Council, the attractive and expanding consumer populations in countries such as Egypt, Saudi Arabia, Iraq and Turkey and the world leading energy and petrochemicals industries.


Whether it happens in the current year or later, index inclusion will lead to increased awareness of and interest in the regional markets. As a result, this will increase appetite for regional funds and improve market liquidity in both short and long term. The biggest beneficiaries will be those markets with strong regulations and latitude in foreign ownership limits and those companies who implement transparent reporting and excellent investor relations operations.

Political risks in the Gulf Co-operation Council region have subsided, and have almost disappeared following the containment of the situation in Bahrain. While turmoil continues outside the GCC, some of these markets including Egypt and Morocco are already in the MSCI emerging markets index. Despite the revolution, Egypt maintained its MSCI Emerging Markets Index status after successfully reopening its market before reaching the minimum 40-day suspension deadline.


Judging from experience and considering the main criteria for inclusion, I don’t see how regional political unrest has anything to do with UAE and Qatar’s inclusion in the MSCI index. Furthermore, MSCI already signaled a positive tone if the two main hurdles are met. None of these hurdles include political stability. Foreign ownership limits and the delivery-versus-payment method are the two most important requirements for consideration in the upcoming review. Both countries, the UAE in particular, have succeeded in meeting those objectives. Political climate is not an issue here, it’s more a structural issue and measures have been taken to comply with requirements. Emirates Securities & Commodities Authority, the chief regulator, already announced that they are now compliant with all MSCI inclusion requirements.

Where Qatar and the UAE included in the emerging markets index, we would expect re-rating or upward revaluations in the short-term, with some passive money finding its way into these markets, boosting liquidity and prices. While some liquidity is expected to flow in we do not anticipate a huge surge of liquidity overnight. The combined weighting of both countries would range between 0.5-0.6% and therefore would not be substantial enough to trigger a gush of liquidity into these markets as managers re-balance their portfolios.

The long-term benefits outweigh the short-term advantages. Being on foreign investors’ the radar screens will push for more transparency, disclosure, reforms and additional instruments being created. It will also help the development and maturity of markets as well as the growth of the regulations.

Both Qatar and the UAE, the countries earmarked for upgrade, are seeing no impact from recent regional turbulence. In fact, both  are viewed as safe havens.


MSCI is basing its decision on the implementation of DVP [delivery versus payment] settlement, assessing foreign ownership limits and evaluating the feedback of market participants – clients, investors, brokers, custodians, regulators. It is possible that investors with limited knowledge of the region may have reservations on the impact of recent events in the Arab world on the UAE and Qatar, but we strongly believe that they would be in the minority and unlikely to influence overall sentiment.

Were they to be included in the index, in the short-term, the selected markets are likely to  rally, but this could be short-lived, as it would be driven largely by domestic, regional and international speculators  looking  for a quick profit.

However, in the long term, the two markets would be exposed to a large pool of stickier funds and given the underlying fundamentals of these markets, we would expect them to experience a gradual inflow of funds. Consensus view is that UAE and Qatar would experience fund flows in the region of $1.5bn to $2bn subsequent to the inclusion. 

Currently, both countries do enjoy active foreign investor participation. These investors tend to be hedge funds with a very short investment perspective and hence increases in foreign participation in the past have been followed by increases in market volatility. However, subsequent to the inclusion in to the MSCI index, we expect investors with longer-term horizons such as pension funds and endowments funds to have a bigger representation in the two markets.

UAE and Qatar are relatively safe investment havens in the region due to their political and economic stability. However, over the past two years these two markets have been trying to meet the requirements of the MSCI without success due to the size of the markets, which is relatively small.


There is no doubt that inclusion on the index will tremendously benefit these countries and the region at large as by being listed on the index, the region would be able to enhance the quality of its investors, attracting long-term and institutional investors. In addition, liquidity in these countries would be improved by the automatic flow of cash that the listing would bring into these markets.

Inclusion in the MSCI Emerging Markets Index is decided on a country-by-country basis. Qatar and the UAE are up for inclusion this year. These countries have not been negatively impacted by political unrest. If anything, there has been a flight to safety in the region with assets and money moving into them from investors who perceive other frontier markets to be less-stable countries. But the situation has kept some international institutional investors on the sidelines, which may have had an impact on liquidity across the Gulf Co-operation Council and Middle East and North Africa (Mena) exchanges.


To be included in the MSCI Emerging Markets Index, a country must have three stocks that meet minimum liquidity criteria. But if liquidity is materially impacted, the countries will have difficulty meeting this threshold. However, despite regional unrest, both Qatar and the UAE have three companies that meet the minimum liquidity criteria. Settlement mechanisms and foreign ownership limits are also significant considerations for inclusion.

The inclusion would raise the region’s profile and liquidity levels. All Mena markets, bar Egypt and Morocco, are classified as ‘frontier’ by MSCI. There is significantly less money run by institutional investors globally benchmarked against the MSCI Frontier Market Index than against the MSCI Emerging Market Index. Index tracking funds will need to buy Qatari and UAE stocks included by MSCI in the MSCI Emerging Market Index in order to accurately track the index. Other global emerging market investors may not be required to buy, but are likely to do so to try to beat their benchmark index by finding attractive stocks in an alternative to the global emerging market universe.

The United Arab Emirates and Qatar are eligible for possible inclusion into the emerging market index this year. Up to this point, both countries have taken concrete steps to improve their chances by implementing operational improvements such as delivery versus payment in the past few months. One of the items that could hinder the prospect of an upgrade is the restriction on foreign ownership in some of the underlying companies. Although there have been some discussions about reducing these restrictions, there is still room for improvement.  Both the UAE and Qatar benefit from strong and established financial and political institutions, which are likely to be viewed as favorable factors for their inclusion in the emerging index.


The impact is expected to be positive on both a short and long-term basis. In the short term, inclusion in the emerging markets index will serve to improve liquidity, as more institutional investors will look at investing in these companies. There are also a number of passive investment vehicles that will invest in regional companies purely because of index replication.  In the long term, we are likely to see more regional companies access the public markets as well as additional improvements in corporate governance and transparency.

©2011 funds global

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