Stock markets in Dubai, Abu Dhabi and Qatar will see relatively large one-off inflows of money at the end of May as funds tracking the MSCI indexes adjust their positions in line with updated benchmarks.
MSCI will move stocks from the United Arab Emirates and Qatar to its emerging market index from its frontier market benchmark at the end of May, meaning they will be tracked by funds with significantly larger combined assets.
This upgrade will lead Kuwait to account for a larger proportion of the frontier market index, also warranting some fresh inflows, although these are likely to be smaller than those in the UAE and Qatar.
"(Fund tracker) EPFR data show that $72 billion passively tracks the MSCI Emerging Market Index; this should translate into passive flows of $445 million into the UAE and $353 million into Qatar," EFG Hermes analysts Simon Kitchen and Mohamed Al Hajj said in a note.
"Netting out flows from funds that track the MSCI Frontier Market 100 Index, total net passive flows will be $286 million for the UAE and $210 million for Qatar."
VTB Capital estimates passive flows into each of the countries at about $390 million, without an adjustment for frontier fund outflows.
IMPACT ON STOCKS MAY VARY
For some stocks, namely DP World, National Bank of Abu Dhabi and Ooredoo, the expected inflows will be more than 10 times bigger than the average daily trading volume, according to the same calculations.
That means purchases by passive funds are likely to temporarily drive up the value of the stocks due to low liquidity.
Other analysts say trading, not just by passive funds, will be initially concentrated in the biggest names because Qatar and the UAE will represent only 5 percent of MSCI's emerging market EMEA (Europe, Middle East and Africa) index, and about 1 percent of the global benchmark.
"At first ... we would only expect the 3-5 most liquid names to directly benefit from the upgrade, volume-wise at least," Matthieu Belondrade and Francois Theret, heads of Global Emerging Equities at Natixis Asset Management, said in a note.
"Once investors get to know these markets better, we could see second and third tier companies also benefiting from the upgrade, with a 6 to 12 months lag. Considering how these markets have performed over the recent period, the upside could be more limited."
Between June 28, 2013, and April 30, 2014, the MSCI UAE Index and the MSCI Qatar Index, still under their frontier market status, have returned 87.8 and 38.7 percent, respectively, according to Natixis.
As the UAE and Qatar leave MSCI's frontier market index, Kuwait and Nigeria are set to become its two biggest markets and funds tracking the benchmark will allocate more money there.
NBK Capital estimated in March that Kuwait's weighting in the frontier index could jump from 18 percentage points to 30 as a result.
However, some analysts say passive inflows into the market might be limited as MSCI has introduced a 40-percent cap on the combined weighting of Kuwait and Nigeria in its frontier market 100 index which most passive funds track.
"It wouldn't be substantial," said Mohamed Al Hajj from EFG Hermes. "And with frontier market you don't have a lot of passive funds. Their total assets under management are about $840 million."
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