MSCI to upgrade Kuwait to EM status

Jun 26th, 2019 | By | Category: ETF and Index News

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MSCI, a leading provider of indices to the ETF industry, has announced its intention to upgrade Kuwait to Emerging Market status following its latest Annual Market Classification Review.

Kuwait hanetf msci emerging market etf

MSCI plans to include the MSCI Kuwait Index in the MSCI Emerging Markets Index in one step coinciding with its May 2020 Semi‐Annual Index Review.

MSCI plans to include the MSCI Kuwait Index in the MSCI Emerging Markets Index in one step coinciding with its May 2020 Semi‐Annual Index Review.

This would lead to an inclusion of nine stocks in the MSCI Emerging Markets Index having a pro forma index weight of approximately 0.5%.

The move would mark a change from the country’s previous status of Frontier Market and echos recent changes made by FTSE Russell and Standard & Poors which designated Kuwait as an emerging market in 2018.

According to estimates from Egyptian investment bank EFG-Hermes, the upgrade is expected to lead to around $2.8 billion inflows into Kuwait’s equity market, potentially providing a boost to the recently launched KMEFIC FTSE Kuwait Equity UCITS ETF (KUW8 LN), Europe’s first ETF to offer pure-play exposure to the equity market of Kuwait.

Jason Griffin, Director of Capital Markets & Business Development at HANetf, the European white-label ETF platform behind KUW8, said “The decision by MSCI to reclassify Kuwait to Emerging Market status will catalyze significant trading activity as index managers rebalance Emerging and Frontier portfolios and active managers seek alpha-generation opportunities.

“Accessing Kuwaiti securities directly is not always straight forward and investors can take advantage of the KMEFIC FTSE Kuwait Equity UCITS ETF to obtain a diverse and transparent basket of Kuwaiti securities in a UCITS structure, supported by an extensive liquidity ecosystem. The rapid growth of assets in KUW8 highlights the ability of the ETF structure to absorb significant assets and the importance of looking beyond screen volumes and understanding the implied liquidity of an ETF.”

HANetf launched the fund in partnership with KMEFIC (Kuwait & Middle East Financial Investment Company), a Kuwait-headquartered provider of asset management, brokerage, and wealth management services.

The ETF is linked to the FTSE Kuwait All-Cap 15% Capped Index which provides exposure to the large, mid, and small-cap segments of Kuwait’s equity market. The index currently includes 13 Kuwaiti companies that are weighted by free-float market capitalization subject to a 15% cap per security.

The fund comes with an expense ratio of 0.80% and has around $25 million in assets under management.

Kuwait’s road to EM status

Kuwait’s Market Development Project officially started in 2017. Key enhancements achieved over this period include the removal of foreign ownership restrictions on listed banks, the simplification of requirements for investor registration, the movement to a T+3 settlement cycle for both local and foreign investors, and the introduction of a new delivery versus payment (DvP) settlement provision and a proper failed trade management process.

Further enhancements expected to be implemented imminently include the introduction of a central clearing counterparty as well as stock swaps, stock lending, and short selling facilities.

Sebastien Lieblich, Global Head of Equity Solutions and Chairman of the MSCI Equity Index Committee, commented, “Kuwait’s Market Development Project has set the path for the seamless implementation of numerous regulatory and operational enhancements in the Kuwaiti equity market.

“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.”

Kuwait’s upgrade to EM status is still subject to certain promised requirements being fulfilled with MSCI planning to announce its final decision by the end of the year.

Lieblich added, “During the consultation, international institutional investors highlighted the criticality of omnibus account structures and same National Investor Number (NIN) cross trade capabilities to avoid frictions in their investment process. We welcome the Capital Market Authority’s public commitment to deliver these market features by November 2019. We will closely monitor their implementation before making the final decision.”

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