Working with the Big Bucks

Boursa Kuwait, as the national stock market of Kuwait and one of the largest stock exchanges in the GCC region, is on the verge of a major upgrade by an international index provider; Morgan Stanley Capital International (MSCI) has put Kuwait on the agenda for its 2019 annual market classification review. If this upgrade comes to pass, it will be one of the most important milestones for Kuwait’s national stock market since its inception. It is also expected that the reclassification will pave the way for over USD2 billion of passive inflows.

Although Boursa Kuwait, in its present incarnation, has been around since 2016, its history goes back to the early 1980s when it was known as the Kuwait Stock Exchange (KSE). Since Boursa Kuwait took over KSE’s operations in 2016, it has made every effort to improve the country’s capital market, and Kuwait’s imminent reclassification from a “frontier market” to an “emerging market” is a sign that the bourse’s efforts are bearing fruit.

Khaled Abdulrazzaq Al Khaled, Boursa Kuwait’s CEO, is confident that his organization’s upgrade by MSCI is bound to happen in 2019. Kuwait made it to MSCI’s watchlist in early 2018, and although the country has already met most of the requirements for an upgrade to emerging market status, May 2020 is the earliest possible date for the reclassification to go into effect.
Kuwait seems to be well-prepared for the transition; according to Al Khaled, the reclassification is in part due to a series of reforms in Kuwait’s equities market which are still in progress. Market reforms have so far brought about the categorization of the listed companies into distinct market segments and the introduction of a more sophisticated listing procedure.
Kuwait’s potential reclassification by international indexers such as MSCI and The Financial Times Stock Exchange Russell 2000 (FTSE Russel)—of which more later—and the reforms heralding the upgrades will also be a blessing for Kuwait’s domestic economy by creating an influx of FDI. There will also be a knock-on effect at work, as the forthcoming investments will put Kuwait back on list for further upgrades, forming a virtuous circle.

In general, such upgrades by international indexers depend on a country’s economic progress. However, there are other factors at work, too; barriers for entry to the equities market such as requirements for listing in a given country in terms of volume and liquidity will also be taken into account, with the accessibility of a country’s market for foreigners counting as an added bonus.
The fact that MSCI, as a world-renowned provider of investment intelligence, has acknowledged Kuwait’s progress is a good omen in itself and a testament to the effectiveness of Boursa Kuwait’s market development program. Moving up from a “frontier” to an “emerging” market status is quite a feat for the national stock exchange of any country and—more often than not—a prelude to capital inflows from international investors.

MSCI’s reclassification of Kuwait is the second development of its kind after, in 2017, the governance board of FTSE Russell added Kuwait to its secondary emerging market index. The transition from “unclassified” to “secondary emerging market” within FTSE Global Equity Index Series (GEIS) was implemented in two stages in 2018, and the inclusion is expected to attract as much as USD1 billion in passive inflows, while placing the country on international investors’ radar.
Saleh Shamma, an expert on emerging investment markets, believes that, “This highlights the increased interest in the Kuwaiti market, which offers a safe haven within a volatile emerging market backdrop,” adding “We believe we have barely scratched the surface in terms of liquidity.”

The first impacts of Kuwait’s classification as a secondary emerging market by FTSE Russel were felt in March 2018, when Kuwait fared the best in the GCC, and foreign inflows to the country exceeded USD264 million, while Saudi Arabia received USD147 million. In an interview with KUNA, Al Khaled also alluded to the Kuwait Vision 2035, whose implementation cannot be complete without a robust, world-class national stock exchange market to accelerate the turnover of capital in a regulated and transparent manner.