Qatar, U.A.E. Shares Jump as MSCI Upgrade Stokes Inflow

Qatari and United Arab Emirates shares rallied after MSCI Inc. upgraded both countries to emerging-market status, stoking bets foreign investors will channel more money into equities in the oil-exporting region.

Qatar’s benchmark QE Index advanced to the highest level in almost five years, while shares in Abu Dhabi, one of seven emirates that make up the U.A.E. along with Dubai, jumped the most in the world today. Following five years of review, MSCI, whose equity indexes are tracked by investors with about $7 trillion in assets, will promote the two countries from frontier-market status as of May 2014.

“It has been a long journey, but we’ve finally arrived,” said Georges Elhedery, head of global markets for the Middle East and North Africa at HSBC Holdings Plc. “Today’s decision firmly establishes the region on the emerging-markets growth map in the minds of global institutional investors.”

The upgrades have the potential to draw $800 million of new funds into Qatari and U.A.E. shares, according to HSBC. Economies in the six-nation Gulf Cooperation Council are growing three times faster than developed markets as governments funnel oil wealth into infrastructure projects, including plans to build stadiums and roads in Qatar before the nation hosts the 2022 soccer World Cup.

Foreign Ownership

As GCC countries were upgraded, MSCI cut Morocco to a frontier market for failing to meet minimum liquidity levels. Morocco’s main index fell 0.4 percent as of 1:54 p.m. in Rabat, set for the lowest level since 2006. Egypt’s EGX 30 Index entered a bear market after MSCI said a worsening of the nation’s foreign-exchange situation may force the index provider to reconsider the country’s emerging-market status.

MSCI raised Qatar and U.A.E. after they adopted changes including a buyer cash-compensation procedure, which enables investors to be paid in cash if a security is unavailable for delivery on settlement day. Qatar, the world’s biggest exporter of liquefied natural gas, has raised foreign-ownership limits of companies in its $141 billion stock exchange, the Qatar Exchange cited Finance Minister Yousef Hussain Kamal as saying on June 5.

Qatar National Bank SAQ, the nation’s biggest listed company and the largest lender in the Middle East, limits foreign ownership at 12.49 percent of capital, according to data on the Qatar Exchange website. Some companies in Qatar and the U.A.E. allow foreigners to own as much as 49 percent.

Investor ‘Gateway’

“Banking, telecommunications and the largest companies” would be the first to benefit from the MSCI upgrade, Salah Shamma, co-head of equity asset management at Franklin Templeton Investments Middle East, said by phone today. “It’s a gateway, you create that gateway and once the investors are in the region then they start to look at second tier.”

Qatar National jumped 4 percent to 155.4 riyals, the highest since 2005. The QE Index rose 1.8 percent to 9,517.95, the strongest since September 2008.

Today’s upgrade helped the U.A.E.’s $153 billion stock markets extend two of the world’s top-5 equity rallies for 2013. Dubai’s has surged 48 percent and Abu Dhabi’s 39 percent, the third- and fifth-best performing gauges globally among 94 tracked by Bloomberg.

Pressuring Saudi

Abu Dhabi’s ADX advanced 2.7 percent, the most since December 2009, while Dubai’s DFM General Index rose 1.6 percent as Emaar Properties PJSC, the company that developed the world’s tallest tower in Dubai, jumped 2.8 percent. Foreign investors, who currently own 15.9 percent of Emaar out of a possible 49 percent, data on the exchange’s website show.

“We see the upgrade a as major game changer for the U.A.E. and Qatar,” Wafic Nsouli, executive director of institutional sales at Arqaam Capital Ltd., said by phone. “The long-term benefits that accompany the upgrade include fund inflows and along with that comes a depth and breadth of liquidity. It’s essentially a place on the map for these markets.”

Still, in the near-term the MSCI upgrades are “unlikely to have any significant near-term impact on how we manage our client portfolios,” Sam Vecht, head of the emerging markets specialist team at BlackRock Inc., said in a statement today.

The Middle East’s biggest stock market is Saudi Arabia, which limits foreign ownership of shares to equity swaps and exchange-traded funds. The top OPEC producer is weighing plans to allow foreigners to buy shares directly in its $405 billion exchange, a move that could draw as much as $30 billion of inflows, according to John Burbank, founder of $3.7 billion San Francisco-based hedge fund Passport Capital LLC.

MSCI’s move “puts additional pressure on Saudi Arabia to accelerate its qualified investor program and we now believe this is likely over summer,” Emad Mostaque, a London-based strategist at Noah Capital Markets EMEA Ltd., said in an e-mailed statement today. The regulations would likely include restrictions on companies located in the holy cities of Mecca and Medina, he said.