* Qatar, UAE move to MSCI's emerging index in May
* This will leave Kuwait by far the biggest frontier market
* May attract some $700 million of additional money
* Some investors starting to buy NBK, Zain in anticipation
* Uncertainty persists over economy, regulation
By Nadia Saleem
DUBAI, March 13 Kuwait's stock market suffered a
blow to its prestige last year when global index compiler MSCI
decided to upgrade Qatar and the United Arab Emirates, leaving
Kuwait languishing in a lower category. Being left behind may
prove profitable for investors in Kuwaiti shares, however.
Qatar and the UAE will move up from frontier market to
emerging market status at the end of May, leaving a big void in
MSCI's frontier index, which will have to be readjusted.
Kuwait will remain in the frontier index and become by far
the biggest market there. So its weighting in the index is
expected to rise sharply - potentially attracting hundreds of
millions of dollars of fresh foreign money to the country.
The weighting increase "should provide significant
additional liquidity into the Kuwaiti market, and therefore be a
positive for Kuwait," NBK Capital said in a research note.
In recent days there have been early signs of some
institutional investors buying beaten-down Kuwaiti blue chips in
anticipation of them drawing more interest after rival Qatari
and UAE stocks have left the frontier index, traders say.
These include National Bank of Kuwait and
telecommunications operator Zain, which are among the
top constituents of the MSCI frontier market index.
Investors have good reason to be disappointed by Kuwait;
persistent tensions between the cabinet and parliament, and a
sluggish bureaucracy, have delayed economic development plans
and slowed improvement of the country's poor infrastructure.
The main Kuwait share index is up 25 percent since
the end of 2012, compared to a 37 percent rise by Saudi Arabia
, 36 percent by Qatar and 142 percent by Dubai
But "passive" investors, which use MSCI weightings to guide
their investment choices, are expected to put more money into
Kuwait when its share of the frontier index rises.
The Kuwaiti market, which has a capitalisation of about $110
billion, had the biggest weight in the frontier index at the end
of February with 17.9 percent. The UAE had 17.3 percent and
Qatar 16.6 percent.
NBK estimates that after Qatar and the UAE leave, Kuwait's
weighting could increase to around 30 percent. A rise of 12
percentage points would imply an additional inflow of about $700
million into Kuwait - more than the approximately $500 million
in passive funds which analysts estimate Qatar and the UAE will
each gain from their upgrades.
Last year, Morocco demonstrated the benefits of being a
relatively big fish in a small pond.
In November it was downgraded from MSCI's emerging markets
index, where it had a miniscule weighting, to the frontier
index, where it has a 4.6 percent weighting. The Moroccan stock
index jumped 10 percent in the preceding weeks.
The question is whether other economic and financial
developments in Kuwait will combine with the expected inflow of
MSCI funds to support an extended rally by the stock market.
In February, the government approved bids worth a total of
$12 billion for major upgrades at two oil refineries. Some
investors see this as a sign that authorities are finally moving
ahead with economic development plans.
"For the first time ever, there are some government changes
- there is a massive pent-up demand for infrastructure work and
the government can't wait anymore," said Rami Sidani, Schroders'
Middle East head of investment.
"We're at a turnaround and the government will start
pressing ahead, albeit slowly. On the ground, projects are
starting to take off, which means there will be lending
opportunities for the banking sector."
Such hopes have been raised and dashed in Kuwait before,
however. And there are potential negatives in the market; the
Capital Markets Authority appears to be cracking down more
strictly on violations of listing and trading rules, for example
by suspending companies that report losses which greatly exceed
In the long term, this is probably good for the market.
A Reuters survey of a dozen international fund managers last
month found they ranked Kuwait lowest among five big Middle
Eastern markets for corporate disclosure and enforcement of
regulations against improper or illicit trading.
In the short term, however, the crackdown may scare the
individual investors who account for the vast majority of
trading in the market, reducing liquidity.
Earlier this month, a Kuwaiti court fined the chairman of Al
Ahli Bank, the country's eighth largest bank by market
capitalisation, 1.5 million dinars ($5.3 million) over alleged
insider trading in the bank's shares. The stock is down 6
percent so far this year.
(Editing by Andrew Torchia)