Growth in indexes a reflection of demand

▶ As countries develop their capital markets, a greater number of jurisdictions are being included in global indexes

Regional stock market indexes have had a growth spurt of late, driven by investor demand for tools to help them decide how best to allocate their money.

Yesterday The National reported that the S&P Dow Jones Indices – among the world’s biggest index makers offering at least 700,000 global indices – plans to launch three new indices for the Middle East and North Africa (Mena).

They include two bond and sukuk high-yield indexes planned for launch later this year, and a Sharia multi-asset class index for launch in the first quarter of 2018.

Global chief executive Alex Matturi proudly stated: “We have the full set of regional indices. They go all the way from your standard market capped Sharia index, to your multi-factor Sharia index, to different asset classes and the only sukuk index in the region.”

S&P Dow Jones’ regional expansion through its increasingly diverse menu of indexes is indicative of a wider trend: rising interest in indexes and index-related products as investors and capital markets become more sophisticated.

In the Middle East, governments are working hard to develop their capital markets in line with international requirements, and more countries in the region are being included in global indexes, boosting the flow of passive investments (those that are not made by “active” investors that pick stocks).

Saudi Arabia, for example, has been tipped for inclusion in the FTSE Russell Emerging Markets index next year and the MSCI Emerging Markets Index in 2019, and this could attract billions of dollars of capital flows.

Analysts say Mena is still primarily an active market, but they also point to a pick-up in passive investments of late, reflected in the spate of regional index-related products. One such example is Nasdaq Dubai and MSCI’s licence agreement this month to develop regional index derivatives.

As capital markets continue to strengthen and the choice for investors broadens, banks, asset managers and sovereign wealth funds will all require more robust market benchmarking tools. Well-crafted indexes based on complex calculations are already regarded as an important means to building a diversified portfolio.

In a region characterised by volatility, such highly specialised or customised indexes and products are likely to play an expanded role in measuring the overall market and helping investors to mitigate risk.