MSCI reclassification to impact Qatar and UAE markets: report

Qatar’s reclassification from the MSCI Frontier Markets Index to Emerging Markets along with the UAE will proportionately increase the exposure to the long-term growth potential of markets in Africa, Asia and Latin America, as well as other markets in the Middle East such as Kuwait and Oman, London-based Baring Asset Management said in a report.

On June 2, Qatar and the UAE will be reclassified to the MSCI Emerging Markets Index. This implements the second part of MSCI’s 2013 Annual Market Classification Review, and follows the reclassification of Greece from Developed to Emerging Market status, and Morocco from Emerging to Frontier market status on November 27, 2013.

“The changes will have a significant effect on the index. Qatar and the UAE currently have a 36.3% weighting and their reclassification will proportionately increase the exposure to the long-term growth potential of markets in Africa, Asia and Latin America, as well as other markets in the Middle East such as Kuwait and Oman,” said Michael Levy, investment manager of EMEA (Europe, the Middle East and Africa) and frontier market equities team at Baring Asset Management.

Africa is one of the regions where Baring Asset Management sees strong long-term investment potential, and one consequence of this change is that it expects to see increased attention directed to markets in the region. It is one of the characteristics of the Frontier Markets universe that it continues to evolve as economies develop, and one of the reasons it remains such an exciting asset class for investors, in its view.

“The reclassification will also help to reduce the overlap between Frontier Markets and the Mena region. Over time, we see both Mena (Middle East and North Africa) and Frontier Equities having a role to play in delivering long-term growth for well-diversified investment portfolios, thanks to positive demographics and urbanisation, the increased discretionary spending which accompanies this, and rich endowments of natural resources, which provide investment opportunities for companies as well as helping to finance the investment in infrastructure needed to support economic and population growth,” the report said.

As there are no changes to the country constituents of the Mena region, the reclassification will have no effect on the Baring Mena Fund. As always, any investment decisions will be determined by our fundamental investment views.

Finally, the effect on the MSCI Emerging Markets Index is likely to be modest, with a probable weighting of just over 1% for the Qatar and the United Arab Emirates when they enter the index in June.

“At the margin, however, we may start to see more institutional investors entering these markets as a consequence of the change, which should be positive for the longer term development of the region,” Baring Asset Management said.