Fairvue Partners released its latest research paper on the changing dynamics of institutional investor interest in the GCC region, as well as Jordan and Lebanon.
The paper discusses the implications of the rapid rise in foreign institutional investment into these markets, against the backdrop of the recent MSCI reclassifications and the impact of wider regulatory reforms.
The findings from the report show that there is clear evidence pointing to a significant increase in the level of foreign institutional investment into the GCC regions, which has risen from $5.1bn in 2012 to almost $10bn by the end of March 2014. It is particularly interesting to note that while 80% of this foreign investment is concentrated in UAE and Qatar alone, the largest proportional rise in the level of foreign investment over the last three years has in fact been seen in Kuwait.
Conversely, Saudi Arabia has the smallest amount of foreign investment of the region, largely due to the restrictions on direct investment from overseas. However, should the market open up, as outlined by the Council of Ministers in July 2014, then it will naturally draw significant interest from around the globe, given its size and maturity.
The MSCI reclassification of Qatar and UAE to emerging market status, announced in May 2014, is also of significance across the entire region. Firstly, it raises the profile amongst active investors around the world and, secondly, dramatically increases the level of index investment the two markets are exposed to; the total investment in index funds tracking MSCI frontier markets indices is $1bn, compared to almost $90bn tracking MSCI emerging market indices. A knock-on benefit of this development has been an increase in the weighting of other GCC countries in the MSCI frontier markets index, where Kuwait now has the highest proportion at 26%.
The increasing level of international investment over the past three years has originated from a wide geographical base, but has been driven in particular by increased investment from North America. This interest is set to grow further, and the issuers adhering to the highest levels of governance and disclosure, as well as proactively engaging with the investment community, will benefit the most.
Commenting on the research, Stu Taylor, head of capital markets research at Fairvue Partners, said, “Clearly, the elevation of UAE and Qatar to emerging markets status will bring significant additional interest from foreign institutional investors, not only to those specific markets but to the wider Gulf region. With that, however, naturally comes a greater level of scrutiny from capital market participants, who will expect standards of disclosure and investor interaction that align with other emerging markets, such as Brazil, South Africa and Russia. Consequently, it is imperative that GCC issuers take steps now to optimise their investor relations practices, as the competition for these new pools of capital will be fierce but, at the same time, the benefits in terms of profile-raising, improved liquidity and sustainable, long-term international investment are potentially transformational for the region.”
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