Once overshadowed by its bigger neighbors in the Gulf, Kuwait’s market has emerged as the new darling of global investors.
Kuwaiti stocks have outperformed most of their Persian Gulf peers since MSCI Inc. said in June that it might announce the upgrade of the nation to emerging-market status next year, joining the ranks of Saudi Arabia, the United Arab Emirates and Qatar. Money is already flowing in ahead of Kuwait’s Sept. 24 accession to FTSE Russell’s emerging-market benchmarks as efforts by the country’s market regulator to boost liquidity and attract international interest pay off.
“Overtaken by the U.A.E. when it comes to economic freedom, and in the shadow of Saudi Arabia’s now-accessible equity market, Kuwait capital markets have been long neglected by investors and Kuwaiti policy makers,” Marshall Stocker, a Boston-based portfolio manager at Eaton Vance Corp., said in an email. “We are invested in Kuwait for an incipient policy liberalization story, one that is admittedly taking quite a while to unfold but is happening if you pull out your looking glass.”
As of the end of 2017, Kuwait ranked 96 in the World Bank’s index for the ease of doing business. The U.A.E., which earned emerging-market status at MSCI in 2013, placed 21 on the World Bank list, while Saudi Arabia was at 92.
Authorities in Kuwait started a series of measures last year to update infrastructure for equities trading. The goal was to stir international interest in one of the region’s oldest stock markets and jolt into life the large portion of shares that typically barely moved each day. In April, the exchange segregated stocks based on criteria such as market value, and unveiled new indexes, including a premier market comprised of Kuwait’s largest and most liquid companies. Still, its $85 billion market value amounts to less than one-fifth of Saudi Arabia’s and is 66 percent lower than Dubai and Abu Dhabi combined.
Kuwait’s market offers a refuge for investors spooked by the roll-back of crisis-era stimulus policies and new global trade skirmishes. It has the “best financial position of any Middle East oil exporter,” with the lowest crude-price break-even point for the state budget, said Stocker. Kuwait’s pegged currency also shields its assets, and consumers, from the recent emerging-market sell-off, he said.
The key Kuwaiti stock index has climbed 10 percent since MSCI’s June 20 announcement, while the benchmark for Saudi Arabia, whose upgrade to emerging-market status MSCI announced that day, has dropped about 6 percent in the period. Overall, developing-nation equities have fallen more than 6 percent.
Saudi Arabia’s stock market was among the three best performers globally in the first half of this year, measured in U.S. dollars, beating the Kuwaiti gain more than sixfold. Investors from outside the region’s Gulf Cooperation Council countries have been able to trade stocks in Kuwait for more than a decade, while those shareholders gained direct-trading access to Saudi equities in mid-2015.
“Given that only FTSE has announced Kuwait’s inclusion into its emerging-market index so far, there is potential for a strong rally if MSCI confirms Kuwait’s inclusion into its EM index,” said M.R. Raghu, the head of research at Kuwait Financial Centre SAK, which manages more than $3 billion. A “sound banking system,” in addition to its high oil reserves, should make Kuwait’s equities attractive, he said.
Trading in Kuwait by global investors, excluding Gulf nationals, tripled to 155 million dinars ($512 million) in the eight months through August from a year earlier, Raghu said. Foreign shareholders’ interest had waned after the global financial crisis a decade ago because of the “lack of robust regulations,” he said.
As in other oil-rich GCC member states, Kuwait’s courtship of investors from outside the region is part of a larger strategy to diversify the economy and scale back costly subsidies following the collapse of crude prices in 2014. Its public sector is one of the largest in the world, with spending accounting for about half of gross domestic product, the World Bank said in a report in April. Economic growth is set to recover to 1.9 percent this year and accelerate to 3.5 percent in 2019, following an estimated contraction last year, according to the bank.
But political disputes have stalled reforms in Kuwait, the most democratic country in the Gulf. Despite an impressive list of mega projects, authorities have been slow to get them off the ground. Parliament has yet to ratify a GCC value-added tax treaty that would enable the nation to formulate its own VAT law as part of economic reforms. A debt law allowing the government to sell more bonds is still in a parliamentary committee and hasn’t yet reached the floor for debate.
“Kuwait is a refuge which is becoming more attractive as economic liberalization ideas increasingly capture the minds of policy makers and investors,” said Stocker at Eaton Vance. “Now it’s time for ideas to become actions.”