Gulf stocks seen unlikely to suffer from MSCI snub

DUBAI, June 16 (Reuters) - Index compiler MSCI's decision not to upgrade three Gulf countries to emerging market status came as no surprise and will not affect stocks in the short term, but will deter major funds from investing, analysts said.

MSCI said on Monday that it would not include Qatar, United Arab Emirates (UAE) and Kuwait in its emerging markets benchmark. [ID:nN15244117]

For Qatar and UAE, it cited the lack of formal segregation between custody and trading accounts and to a lesser extent foreign ownership restrictions.

Qatar and the UAE will remain under review for a possible upgrade, but MSCI is no longer considering raising Kuwait's status because of its market accessibility restrictions.

"This news was already priced into stocks -- most of the analysts were saying this was going to happen," said Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading. "An upgrade would have given a huge upside potential, but no upgrade will have very little impact."

Ali Khan, managing director and head of brokerage at Dubai's Arqaam Capital, also said MSCI's decision was not a surprise.

"I doubt the market will react negatively to MSCI's decision -- the consultation process was very open," said Khan. "It's very clear from the guidance MSCI has given that the measures needed for the UAE and Qatar to be upgraded are achievable."

However, the Gulf's continued absence from the MSCI Emerging Market Index is likely to be negative in the long-term because its is the benchmark against which fund managers performance in non-developed markets are measured.

The fund managers typically allocate up to 90 percent of their portfolios in line with index weightings, with the remainder underweight or overweight in select stocks as they try to beat the benchmark.

"If you're sitting in London and your bonus depends on beating the MSCI, why would you invest in stocks that aren't even included in this?" asked Robert McKinnon, Al Mal Capital managing director of equity research.

"If Gulf stocks were included, managers might be underweight or overweight in them, but they would need to have some holdings. If they buy Gulf stocks (now), they're taking a huge risk."

Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments, said speculative funds would trade Gulf stocks, but the big players including pension funds would not unless these countries were included in the index.

"This makes the Gulf more vulnerable to opportunistic, shorter-term investors," Arabi said.

International funds have returned to the Dubai Financial Market, but their activity is a fraction of former levels.

In January 2008, non-Arab investors bought 10.6 billion dirhams ($2.83 billion) of shares as Dubai's index hit a near two-year peak. By December, buying by the group had shrunk to 499 million dirhams.

From January 2008 to the end of March 2009, net selling by international funds totalled 8.4 billion dirhams. However, they were net buyers of 824 million dirhams in April and May combined. ($1=3.750 Saudi Arabian Riyal) (Reporting by Matt Smith; editing by Karen Foster)