Foreigners target key UAE, Qatar blue chips before MSCI upgrade

03/04/2014 19:03 AST

Foreign funds are flowing into the United Arab Emirates and Qatar as those markets prepare to be upgraded by global equity index compilers this year - but so far only a few top blue chips are benefiting much, a Reuters study of trading data shows. At the end of May, MSCI will raise the UAE and Qatar to emerging market from frontier market status. S&P Dow Jones Indices will do the same in September. By putting those countries on the radar screens of international fund managers, the upgrades are expected to bring billions of dollars of fresh money to the markets. The data shows the inflows of funds have already begun.
But it also indicates that only a handful of stocks, such as Dubai's Emaar Properties and Qatar National Bank , are getting the lion's share of the money, while most stocks are being neglected - a trend that may leave the top stocks vulnerable to profit-taking in coming months.
"Possibly it is due to liquidity and free float conditions. For stocks in the UAE and Qatar, there is quite a big difference in terms of how much is available for foreigners," said Simon Kitchen, director of regional strategy at EFG Hermes.
"There are large-cap stocks like Emirates NBD which foreigners would like to buy but which have tight foreign ownership limits. Investors are forced into a limited number of stocks."
Another factor may be uncertainty over exactly which individual stocks will be included in the revised MSCI and S&P Dow Jones emerging market indexes; investors are sticking to a few stocks which seem absolutely certain to be chosen. PASSIVE
The foreign fund inflows will come in two forms. Passive funds, which directly track MSCI and S&P Dow Jones indexes, are expected to buy the stocks which are included in the revised emerging market indexes, in the same weightings.
The experience of Greece, which was downgraded to emerging market from developed market status last November, suggests passive funds only enter markets on the eve of index changes, EFG Hermes says.
The volume of such funds looks likely to be small; analysts at HSBC have projected MSCI-related passive inflows into the UAE and Qatar at about $500 million for each country. Flows related to S&P Dow Jones will be smaller, fund managers believe.
EFG Hermes expects even smaller gross MSCI-related passive inflows of about $270 million into the UAE and $220 million into Qatar - and they would be partly offset by outflows of some $100 million each from passive funds tracking MSCI's frontier index.
These numbers are not large compared to the size of the markets; UAE bourses have a combined capitalisation of around $250 billion and Qatar's capitalisation is about $185 billion.
The bigger impact will come from active funds, which benchmark themselves against indexes more loosely and have much more flexibility with allocations and timing; they will be drawn by the "halo effect" of markets' higher status.
Active fund inflows are harder to project but VTB Capital estimates Qatar may attract as much as $2.6 billion of such money as a result of the MSCI upgrade, with the UAE drawing up to $2.3 billion.
The data shows some of that money has already arrived. According to figures from Dubai .
Part of that rise was due to higher share prices, but while market capitalisation grew 23.2 percent in that period, the value of stocks held by foreigners jumped 38.3 percent. This implies that foreigners invested a net $750-970 million in Dubai, Reuters calculations indicate.
Abu Dhabi's bourse actually saw a small net outflow in the period, mostly because foreigners pulled $152-167 million out of First Gulf Bank, reducing their combined stake by 1 percentage point, the calculations show. In Qatar, net inflows of foreign money - from all sources including the Gulf, since Qatar does not break out the data - totalled $790-848 million, according to Qatar Exchange and Thomson Reuters data.

Reuters