The MSCI, one of the most important investment research firms which provides indices, performance analytics, portfolio risk and governance tools to hedge funds and institutional investors, has recently upgraded Kuwait’s equities to its main Emerging Market Index. The MSCI Index is a measurement of stock market performance in a particular area, and like other indexes such as the Dow Jones Averages and the S&P 500 it tracks the performance of stocks included in the market. In particular, the MSCI Emerging Market index is the index used to measure equity market performance in 24 emerging countries, such as Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece ecc.
The index compiles the market capitalization of all the companies that are listed in the stock markets in these countries. It is estimated that $1.7 trillion is invested in all emerging market funds and that it represents the 13% of the world’s total market capitalization. Due to intrinsic political and monetary risks, emerging markets are considered a risky investment, and investors should be prepared to receive volatile returns.
Until May this year, Kuwaiti stocks returned a staggering 22 percent, compared to the 4% average for emerging markets overall. Moreover, the gulf country’s stock market has an already impressive value of $98 billion similar in size to those of Ireland and New Zealand, and is currently the biggest member of the MSCI’s main frontier gauge.
Kuwait will now compete to attract investments with much bigger markets such as Brazil, China, India, Russia and the neighboring country Saudi Arabia which joined the MSCI’s Emerging Market Index earlier this year. The upgrade of Kuwaiti equities, which was previously regarded as frontier market, is seen as a move that could attract billions of dollars of inflows from funds. The National Bank of Kuwait, Ahli United Bank and Kuwait Finance House KSCP altogether are expected to earn $1.8 billion from passive investors following the prospective upgrade.
This upgrade will also benefit Kuwait in many ways. Firstly, the inclusion in the index will increase the exposure of stocks to International investors and lead to passive inflows from funds.
Capital inflows will substantially boost liquidity in the economy and consequently increase the ability of banks to lend money. The inclusion in a global index such as the MSCI would lead to a fall in.
equity risk premium as the risk is spread out on new investors around the world, as a consequence stock prices would expand and attract even more investors to the market.
Although this upgrade is subject to certain specifications and reforms, the country’s capital market regulator has confirmed that Kuwait will meet all these requirements before the end of November, just in time before MSCI announces its final decision by the end of the year.