NBK analyses Kuwait’s upgrade, inclusion in FTSE Russell index
Dr Husayn examines recent trend for passive investing among investors
KUWAIT: Dr Husayn Shahrur, Managing Director of the MENA Asset Management Division at NBK Capital, presented on Kuwait’s upgrade and subsequent inclusion to FTSE Russell’s emerging market index. His presentation focused on three main areas:
Passive investing theme - Dr Husayn, spoke at length on the recent trend in preference for passive investing among investors and shared an insightful analysis on the increasing popularity of passive investment strategies in developed markets as seen in trend in asset flows across the globe. The ongoing trend in passive investing supports the growing importance of globally followed benchmarks like MSCI Emerging Market index and FTSE Russell Emerging Market index, which track sizeable assets across emerging equity markets. He emphasized that Kuwait, a FTSE Russell Emerging Market constituent and a potential entrant in MSCI EM index, is likely to be immensely benefit in terms of notable flows going forward thus paving way for greater foreign participation.
Index Classification - He further presented on the major global index providers / indices that play a critical role in shaping and influencing investment strategies globally. He also discussed the rationale behind country classification, delved deep into developed, emerging and frontier countries as classified by MSCI and FTSE, and provided an insight on the constituents of the emerging market indices.
Kuwait’s upgrade to emerging market status and its implications going forward - Dr. Husayn also spoke on Kuwait’s recent upgrade to emerging market status and its implications for the local stock market going forward. He highlighted how the recently announced upgrade and subsequent inclusion to FTSE Russell’s emerging market index is likely to be an important development for the country’s stock market in more than one way. Dr. Husayn expects that the FTSE upgrade will likely lead to overall improvement in the investing environment in Kuwait through increased presence of institutional investors. This could in turn result in multiple positives - positive market sentiments, improved liquidity, increased transparency/governance, increased number of IPOs / equity issuances, increased focus on improving shareholder’s returns, lower cost of capital due to lower equity risk premium, increased market sophistication by introduction of derivatives and similar hedging tools etc. He highlighted that the success of the FTSE upgrade has been a function of a slew of reforms achieved by Capital Markets Authority (CMA) and Boursa Kuwait. He briefly touched upon notable initiatives like change in settlement cycle, change in tick sizes, market segmentation etc. which have been successfully achieved over the recent past. He lauded the ongoing initiatives of Capital Markets Authority (CMA) and Boursa Kuwait, which broadly aims at reforming the existing regulatory, operational and organizational framework to align with international standards which is also likely to make the investment case for Kuwait stronger.
He further commented on expected flows and discussed in detail the inclusion process for Kuwait. He highlighted that Kuwait’s inclusion is likely to attract passive inflows of around USD 800 - 900 million in addition to active flows. Dr. Husayn also spoke about Kuwait’s potential inclusion in MSCI EM index, which could happen by June 2020, provided MSCI decides to upgrade Kuwait to emerging market status by June 2019. This is likely to further support Kuwait’s overall investment case, which offers investors the right mix of fundamental attractiveness and fund flow related catalysts. He highlighted that high oil prices, solid macroeconomic outlook resulting in healthy earnings growth across key sectors is likely to underpin Kuwait’s fundamental outlook. This when supported with the second tranche of FTSE flows (expected to be around USD 400-450 million) which will be effective from 24th December 2018 (majority of trading expected on 20th December 2018) is likely to strengthen the case for Kuwaiti equity market. He highlighted that these structural developments will be key for the GCC region as a whole and its increased prominence among global investors going forward. The region’s potential increased weight on the index coupled with relatively low foreign ownership of companies will likely lead to increased participation from foreign institutional investors.
Dr. Husayn concluded his presentation with a discussion on institutional investors and their role in shaping any market.
Finally, in response to questions from members of the media teams, Dr. Shahrur clarified the following: Managers of passive funds typically have some flexibility of rebalancing their portfolios and do not necessarily have to buy all the quantities they require on the day of the upgrade implementation.
Typically, ahead of passive flows, active managers try to capitalize on the upgrade event and position their funds in the stocks that are expected to be part of the index. Consistent with this, the Kuwait Bourse saw an 80% increase in foreign funds flows in the first eight months of 2018 as compare to the same period of 2017.
It is expected that there were significant foreign inflows in September, especially on Sep 20. When the September data is released, this will be evident. However, the net figures need not be very close to the amount expected from passive funds. It is possible that the net foreign fund flows in September were lower or higher depending on whether active managers were net buyers or sellers in September. This is especially so given that it is believed that active foreign managers were net buyers in the first eight months in 2018 as evident by the increase in net foreign inflows.