Kuwait's upgrade to MSCI emerging market status on track, Arqaam Capital says

Move could attract $2.8 billion in inflows from passive funds to its equities market

The upgrade of Kuwaiti to MSCI emerging markets status is on track, according to a report by Arqaam. EPA.

The upgrade of Kuwaiti equities to MSCI emerging markets status is on track and a final decision is expected before the year end, investment bank Arqaam Capital said.

MSCI, the world's largest index provider, said in June that it would upgrade Kuwait to EM status in May 2020, depending on further reforms, with a final announcement set for December.

"The upgrade to EM status is contingent on the implementation of omnibus account structures and the same National Investor Number cross-trades for international investors. The Kuwaiti authorities have until the end of next month to implement these changes," Arqaam said in a report.

Arqaam expects Kuwait to be included in the emerging market status in May, a reclassification that could attract $2.8 billion (Dh10.28bn) of inflows from passive funds to its equities market. Kuwait will be the fourth country from the region after the UAE, Qatar and Saudi Arabia to be reclassified as an EM by MSCI. It is currently the biggest market by capitalisation in the lower-ranked Frontier Market index, with a weighting of above 30 per cent.

Kuwait has a stable economy with a fiscal surplus of 6.7 per cent even with oil prices of $60 per barrel. Arqaam expects austerity measures, like the implementation of Valued Added Tax and an excise tax, to be delayed to 2021 or later, and domestic spending is not expected to pick up due to ongoing tensions between the country's parliament and government.

Interest rates in the country are likely to fall as the Central Bank of Kuwait is set to follow the US Federal Reserve in cutting rates, the report said.

The Kuwait Premier Market index, made up of the country's biggest shares, has been the top performer of all Arabian Gulf markets this year, increasing in value by 17.2 per cent during the first nine months, according to a Kamco Research report, as active investors buy stocks ahead of a potential upgrade by MSCI. Despite this, a handful of attractive opportunities remain in Kuwaiti equities including Viva, Ooredoo Kuwait, Meezan, Humansoft, Jazeera and National Bank of Kuwait (NBK), Arqaam's report said.

“We remain buyers of NBK, despite already fair valuation on index flows, and Humansoft, despite negative earnings surprises, both part of the potential MSCI EM Index,” it said.

“Outside the standard index we see deeper value, and we recommend Gulf, Jazeera, Meezan, Ooredoo and Viva, with the latter three having substantial upside potential.”

Arqaam's note said gross domestic product is likely to remain under pressure due to the lower oil price and ongoing production cuts. Kuwait’s real GDP expanded 0.4 per cent year-on-year in the second quarter of 2019 with total oil GDP down 0.4 per cent, but non-oil GDP growing 1.4 per cent year-on-year in the second quarter.