The MENA region has been one of the most fascinating stories in Emerging Markets over the past few years.
Notwithstanding its strong economic growth; it is the wind of economic reforms sweeping across the region which seems to be the most appealing factor to international investors.
Whilst the UAE and Qatar opened up their markets to foreign investors almost a decade ago, other major regional economies – principally Saudi Arabia – have only recently started to follow suit. Saudi Arabia has justifiably grasped the attention of Global EM investors worldwide due to the size and liquidity of its markets; a new player is however starting to emerge: Kuwait.
Kuwait has been diligently implementing a series of expansive economic and market reforms; a strategy they hope will leave a legacy of foreign institutional investment, facilitated by index inclusion and subsequently, eliminating their decades-long dependency on commodities.
Those reforms in Kuwait have helped fortify its standing, and convinced FTSE Russell to add the country to its Emerging Markets Index, a milestone that resulted in over USD1.4 billion of foreign investment moving into the local equity market throughout 2018 and 2019. In June last year MSCI said it would reclassify its Kuwait index to emerging markets status, subject to enhancements that made it easier for overseas institutional investors to access the country’s equity market before the end of November 2019.
During the MSCI consultation, international investors highlighted their critical need for omnibus account structures and same national investor number (NIN) cross trades being made available. In October 2019 the Kuwait Capital Market Authority announced it was changing some executive bylaws and rules and international investors were able confirm that these two enhancements have been put into practice. There have also been some significant enhancements into the clearing and custody process championed by the Kuwait Clearing Company.
As a result, MSCI confirmed in December 2019 that Kuwait will be included in MSCI Emerging Markets Index in one step during the May 2020 semi‐annual review. As a result, nine Kuwaiti stocks will be included in the Emerging Markets Index with an estimated weight of 0.69% according to MSCI.
The inclusion of Kuwait in the MSCI Emerging Markets Index in May 2020 has presented an opportunity for improving the country’s equity market structure; and in turn, facilitating the access to trading of local stocks for international institutional investors.
HSBC has a long history in Kuwait; where it has been operating for several decades and has an extensive footprint. Alongside the Global Emerging equity business in London, HSBC has begun a 5 month long engagement with all stakeholders in a successful MSCI Kuwait inclusion that will witness a $3-4bn* of foreign capital moving into Bursa Kuwait. It is also one of the rare vertically integrated banks in the region which has the ability to also engage clients across sub-custody and foreign exchange and providing a full overview of the trading cycle to clients.
The MENA region overall is at the forefront of reforms, and is often perceived as a monolithic entity by international investors. Reclassification should not be seen as an end result, but rather the beginning of a journey. As MENA economies endeavour to improve their markets, they will be recompensed with increased index weightings, which in turn will encourage greater active and passive flows, and ultimately deeper liquidity.
Camille Asmar is Head of Global Emerging Markets Equity Sales, EMEA and Michael Fidance is Global Emerging Markets Execution Strategies at HSBC.