The upgrade by Morgan and Stanley Capital International (MSCI) is expected to result in billions of dollars of investor inflows into the Boursa. In addition to boosting liquidity, corporate governance and earnings growth, the reclassification is expected to result in the country’s stock market attracting an additional $2.8 billion in passive investment flows, according to market analysts.
Leading global stock market indices provider, Morgan and Stanley Capital International (MSCI), said last week that it would upgrade Boursa Kuwait in its main Emerging Markets index effective May 2020.Boursa Kuwait, referred to by local investors as the Boursa is valued at around $98 billion and is currently the biggest member of the MSCI’s main Frontier index.
The reclassification from a Frontier Market to Emerging Market status will see nine of Kuwait’s blue chip companies being included in MSCI’s emerging markets benchmark from May next year, with an index weighting of 0.5 percent. MSCI’s emerging markets index is currently tracked by about $1.9 trillion in investment funds globally.
Kuwait Boursa has been one of the better performing stock exchanges in the region in recent financial quarters. In the year through to May 31, stocks on the exchange returned 22 percent, versus 4 percent for emerging markets overall. The Boursa’s biggest names include National Bank of Kuwait (NBK) and Agility, a global logistics business.
Since 2016 when Boursa Kuwait took over management of the former Kuwait Stock Exchange, investment activity has spiked and the Boursa is proving attractive not only to investors in Kuwait, but also regionally and on the international level.
A major reason for the renewed interest and confidence in the Boursa was the takeover and makeover of the erstwhile stock exchange by the new management, under the overarching aegis of the Capital Markets Authority (CMA).
The need for a securities regulatory entity was discussed as early as the early 1980s, in the aftermath of the infamous Souk Al-Manakh crisis that devastated Kuwait’s financial securities market. However, as with all things in Kuwait, the CMA was finally launched only in 2010, nearly three decades after the debacle of Souk Al-Manakh.
In 2010, the then prevailing fragmented nature of supervision over securities trading led to the establishment of the CMA. The Authority was given the broad mandate to regulate and supervise all activities related to securities trading, implement corporate governance regulations, ensure transparency in operations and protect investors from unfair practices.
Since its inception, the CMA, working in tandem with Boursa Kuwait, has initiated and implemented a series of ambitious reforms and revamps aimed at raising standard of the Boursa to international levels, and increasing efficiency and efficacy of operations in order to eventually lift the Boursa from its Frontier market status to that of an Emerging market.
These efforts began to bear fruit as early as September 2017 when Boursa Kuwait was given an upgrade to Emerging Market status in the FTSE Russell Emerging Markets Index. This was followed, in December 2018, by the S&P raising Boursa Kuwait to Emerging Market status in the Dow Jones Indices’ Global Equity Indices. Now the third upgrade by MSCI is a further validation that the reforms undertaken by CMA and Boursa Kuwait are in the right direction.
Despite the long and chequered history of financial trading in Kuwait, which can be traced back more than half-a-century to the 1970s and the oil boom era, the Boursa Kuwait remains a market focused on a single product —equities. The Boursa has yet to develop a debt platform or venture into the more complicated derivatives market, but playing it relatively safe and remaining focused on the equities market has had its plus points.
Today, the Boursa’s equity instruments cover a wide range of economic activity in the country and list over 200 firms that include many of Kuwait’s leading companies. With 44 percent of total traded value coming from individuals, and local companies being responsible for 37 percent of trading activities the high reliance on local investors is a cause for concern to the Boursa.
Before the 2008 global financial crisis many citizens directed their disposable income to the equities market and realized double-digit returns. But market reversals during the financially tumultuous years following 2008, as well as in the wake of the oil price slump in mid 2014, left many people in financial loss. Capital flew from equities on both occasions and left the market stagnant for the next several years.
The exodus of retail investors at the slightest pretext highlights the volatility risk to the Boursa in having a large component of small, individual investors. The exchange is aware that its long-term sustainability depends on attracting large institutional investors, both local and international.
As part of its market development plans and attract institutional investors, Boursa Kuwait has launched several reforms in recent years, including a new rule-book, which specify a three-tiered market segmentation, consisting of the premier market, the main market, and the auction market.
In addition, the Boursa has introduced over-the-counter trading platform to enable investors to trade unlisted securities with greater transparency. It also recently launched part one of its phase three market development plans, which includes the launch of real estate investment trusts (REITs), tender offers, trade at last and stock swaps, with plans to introduce further services and tools over the coming months.
Being upgraded to Emerging Market status provides a fillip to the CMA and Boursa to continue their ongoing reforms. Congratulating CMA and Boursa on the upgrading, the Minister of Commerce and Industry and Minister of State for Services Affairs Khaled Al-Roudhan, said it would further promote His Highness the Amir Sheikh Sabah Al-Ahmad al-Jaber Al-Sabah’s vision of transforming the country into a financial, commercial and cultural center in the region.
He pointed out that since its inception, the CMA has sought to regulate the stocks and develop the financial market according to the best international criteria. “This upgrade is the result of great efforts and diligent work by the CMA, the Kuwaiti Clearing Company and the Boursa Kuwait, and is complementary to efforts by the government at various levels to overhaul businesses and enhance the environment to attract more foreign investments to the country.”
The Head of the CMA Commissioners, Othman Al-Issa, said MSCI’s reclassification of Kuwait to Emerging Markets represents a recognition of the instrumental role Boursa Kuwait played in improving market access and efficiency, enhancing transparency and governance, increasing liquidity and strengthening investor confidence over the last two years.
For his part the Chairman of Boursa Kuwait, Hamad Al-Humaidhi, described MSCI’s decision to add Kuwait to its main index tracking stocks in Emerging Markets next year as a “game changer”. He said the reclassification was an “important milestone” and “will bolster the country’s standing on the global investment map”.
He added, “This development will not only provide a boost to our economy but also propel the transformation of the country into a regional and global center of commerce and finance as envisaged by the Kuwait Vision 2035. Moreover, it will be a gamechanger for the domestic capital markets as it will lead to substantial inflows of foreign investment, improved liquidity, and a significant enhancement in the investing environment in the country.”
– The Times Report