Subject to the availability of omnibus account structures and some cross-trade details for international investors before the end of November, Kuwait is likely to be given the final nod in December.
“Kuwait’s Market Development Project has set the path for the seamless implementation of numerous regulatory and operational enhancements in the Kuwaiti equity market,” said Sebastien Lieblich, global head of equity solutions and chairman of the MSCI Equity Index Committee.
“These enhancements have significantly increased the accessibility level of the Kuwaiti equity market for international institutional investors and resulted in broad positive feedback from these investors on our reclassification proposal.”
The MSCI news was welcomed by Abdullah Albusairi, director for advisory and product development at the Kuwait & Middle East Financial Investment Company which launched the KMEFIC FTSE Kuwait Equity UCITS ETF via white label provider HANetf in April.
Noting that asset growth at the fund had spiked in the months leading up to the announcement, he said that it “recognizes the rapid progress in the modernization and diversification of the Kuwaiti economy and capital markets infrastructure.”
“We expect the MSCI announcement to drive over $2.8bn of passive flows alone, alongside significant activity from active managers seeking to get ahead of the rebalance.”
Should the index committee rubber-stamp the move in December, Kuwait will be added to the MSCI Emerging Market Index in the May 2020 rebalance with an initial weight of circa 0.5% representing $2.8bn of market capitalisation.
The decision by MSCI follows on the heels of similar reclassifications by index leaders FTSE Russell and S&P, that upgraded Kuwait in 2018.
The Market Development Project has seen the Kuwaiti authorities improve the infrastructure of their capital markets as well as improve accessibility for foreign investors including the lifting of restrictions on investment in its banking sector. The country is in the middle of an extensive long-term economic diversification programme, Vision 2035, designed to encourage foreign investment and reduce dependency on oil revenues.
The KMEFIC FTSE Kuwait Equity UCITS ETF has grown 2,488% in the three months since launch. It was launched on the London Stock Exchange, Borsa Italiana and XETRA.
Hector McNeil, co-chief executive of HANetf said: "Since we launched this fund two months ago, we have received tremendous interest as investors believe that increase in the weight of Kuwait across a number of indices will drive over $2.5bn of passive flows to their listed companies.”
MSCI goes to Iceland
In the same announcement MSCI said it was launching a consultation to potentially reclassify the MSCI Iceland Index from Standalone Markets to Frontier Markets status. It is currently consulting on the move and will announce the result before the end of November.
Potentially heading in the other direction is Peru. MSCI said that if the Peru Index falls short of the required three constituents for the Emerging Markets, it will immediately launch a consultation to potentially reclassify the MSCI Peru Index from Emerging Markets status to Frontier Markets status. The MSCI Peru Index currently includes the minimum of three constituents.