MSCI adds Kuwait stocks to emerging market index at 0.58% weight

DUBAI (Reuters) - MSCI, the world’s largest index provider, on Wednesday reclassified Kuwait stock indexes to emerging markets status from frontier, a move that could funnel at least $2 billion in passive investment flows.

Seven Kuwaiti securities will be added to the benchmark MSCI Emerging Markets Index .MSCIEF at an aggregate weight of 0.58%, MSCI said.

Kuwait will effectively be reclassified to the Emerging Market Index after the Nov. 30 close, while the deletion of Kuwaiti securities from the Frontier Markets 100 index .MXFM100 will be phased over five successive index reviews, MSCI said.

The implementation was originally expected in May but was delayed because of the COVID-19 pandemic. MSCI announced Kuwait’s reclassification late last year.

Kuwait relies on oil for about 90% of its revenues and has sought to diversify its economy as it faces one of the Gulf’s worst economic crunches. It has burned through its financial reserves to plug a widening deficit and the IMF expects its economy to shrink by 8.1% this year.

Kuwait is currently by far the largest constituent of the MSCI Frontier Markets Index, making up 36.15% of it.

“Taking Kuwait’s roughly $100 million of daily trading out of the Frontier does diminish liquidity dramatically,” said Hasnain Malik, head of equity research at Tellimer, adding that was the reason MSCI was phasing Kuwait’s exit from the FM 100 Index.

Salah Shamma, head of investment, MENA, at Franklin Templeton Emerging Markets Equity, expects the reclassification to bring over $2 billion in passive flows to the Kuwaiti index.

“Kuwait’s inclusion should increase the MENA region’s representation in the MSCI Emerging Market Index to 6%, making it a sizable region within the wider EM index and rendering it more difficult for investment managers to ignore,” Shamma said.

Kamco Invest said in a research note that it expected passive flows to be $2.9 billion, down from a previous estimate of $3.1 billion, reflecting “the broad decline in the Kuwaiti indices”.

Kuwait’s main index has dropped nearly 13% in the year to date, making it the second-worst performing main index in the Gulf behind Dubai’s.