“Investors Closely Watching UAE and Qatar for Potential MSCI Upgrade”

In a matter of hours, Morgan Stanley Capital International will decide whether the United Arab Emirates and Qatar will be upgraded from frontier market to emerging market status, and release the potential for a massive increase in foreign capital flows into these two countries. The Morgan Stanley Capital International (MSCI) Emerging Markets Index measures equity market performance in global emerging markets. At the moment, 21 countries are in the index.

The excitement coming from the possibility of a MSCI upgrade can be felt around the globe. There is a hush amongst the global audience - an upgrade to “emerging market status” would place Qatar and the UAE to the level of countries such as India, China and Russia. This would put them on the radar for large global emerging market investment funds. There is a potential that it would have a positive impact on investment flows into other GCC markets.

The early word from analysts is that caps on foreign ownership would crush growing ambitions. "The stringent foreign ownership limits in both countries,” according to Andrea Nannini, a HSBC fund manager, “remain a major obstacle for the upgrade--in particular in the case of Qatar.” Those who believe that an upgrade is imminent refer to initiatives such as DvP, or “delivery versus payment,” that was demanded by MSCI and supported and accepted by both markets. Critics point to issues such as fragmented markets, low trading volumes, and continuing limits on foreign ownership of companies as deterrents. With many analysts and investors watching and tracking emerging markets, an upgrade to emerging status would be essential to boosting liquidity and attracting investors to the region's stock markets.

Clearly, analysts are divided on the benefits of an upgrade. Some predict an increase in inflows of USD360 million for Qatar and about USD230 million for the UAE. Others worry that these inflows will feed asset-price bubbles in these markets. Regardless, this MSCI assessment will be one of the “must watch” events of the financial markets this week. We look forward to hearing your views on this subject.