Gulf weightings increase on MSCI Emerging Markets

March 21, 2024, 9:52 AM

Rafael Henrique/SOPA Images/Sipa USA/Reuters Connect

According to MSCI, there were more than $1.3 trillion in assets under management benchmarked against its emerging markets indices as of the end of 2022

Gulf weighting up since MSCI inclusion
Saudi Arabia highest at 4.4%
South Korea could have impact

The MSCI Emerging Markets Index has increased the weightings of Gulf countries since their inclusion on the benchmark, as regulators loosened rules and companies ease foreign ownership restrictions to make it easier to invest.

According to MSCI, more than $1.3 trillion in assets under management (AuM) was benchmarked against its emerging markets indexes as of the end of 2022.

In December, the AuM in passive funds worldwide exceeded that of their active counterparts for the first time, Morningstar estimates.

The MSCI Emerging Markets Index spans 24 countries, including the Gulf quartet of Saudi Arabia, the United Arab Emirates, Kuwait and Qatar, plus countries including China, South Korea, India, Brazil, Mexico and South Africa.

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“China’s weighting in the emerging markets indexes has shrunk recently as the stocks have faltered,” said Todd Rosenbluth, head of research at VettaFi, a company specialising in the analysis of exchange-traded funds (ETFs). “Other smaller markets have gained and are more important drivers of the benchmark than before.”

Among Gulf countries, Saudi Arabia’s weighting on the MSCI Emerging Market Index is the biggest at 4.4 percent as of February 15, followed by the United Arab Emirates (1.3 percent), Qatar (0.9 percent) and Kuwait (0.8 percent).

When Qatar and the UAE joined the benchmark in 2014 their respective weightings were 0.6 and 0.5 percent respectively. Saudi Arabia’s was 1.4 percent upon inclusion in 2019 and Kuwait’s was 0.5 percent when it was admitted in 2020.

ETFs benchmarked against indexes typically follow their weightings, but there is some leeway to be under- or over-weight in each constituent stock, because of the fluctuating nature of share prices and other considerations such as market access.

The initial small weightings for Gulf countries meant that passive funds could largely ignore the quartet – Saudi Arabia aside – if they wished and still comply with their investment mandates.

Since joining, the group’s relative representation on the index has increased as many large-cap listed companies in these countries increased their foreign ownership limits and so became either eligible for inclusion or deserving of greater weighting.

That has pushed passive funds to invest as the countries’ heavyweight stocks become too large in weighting terms to overlook.

Assessing how closely ETFs follow the index weightings is complicated by there being multiple variations on the main emerging market benchmark for which the data is not necessarily public, while some opt for indirect exposure via other ETFs domiciled elsewhere but which invest in, for example, Saudi stocks.

South Korea's impact

Last June, MSCI opted against upgrading South Korea to developed market status, noting the regulator must introduce various reforms and then international investors should be given time to evaluate “the efficacy of the changes”.

The necessary changes are under way, so South Korea could be approved for developed market status from 2026.

If so, the removal of South Korean companies – which at a combined 12.5 percent represent the fourth-largest on the MSCI Emerging Market Index after China (25.2 percent), India (17.7 percent) and Taiwan (16.9 percent) – would result in the weightings of the remaining countries increasing.

As such, the Gulf quartet would attract further inflows from ETFs tracking the benchmark, boosting stock prices.

Since their respective inclusions in the MSCI Emerging Market Index, Saudi Arabia’s main stock benchmark is up about 46 percent, Kuwait’s premier market index has gained 36 percent and Abu Dhabi’s has more than doubled.

The Qatar and Dubai indexes, however, have fallen about 21 and 16 percent, although both markets surged ahead of joining in 2014.