Investors return to MENA
With interest rates in developed markets at historic lows, investors are seeking superior returns by building up their exposures to emerging economies. “Since the last quarter of 2020, MENA markets – especially those with a reputation for sensible economic management and limited currency and interest rate volatility - have been seeing healthy inflows,” commented Gunsel Topbas, Head of Securities Services, EMEA Emerging Markets at Citi.
“Global institutions in Europe and North America have been trading Egyptian securities for a long time now. However, they have started relatively recently investing across the GCC [Gulf Cooperation Council] countries. We have also observed that more Chinese institutions are now investing into emerging markets such as MENA,” continued Topbas.
Inflows into the GCC - principally Saudi Arabia and Kuwait - have been facilitated by index inclusion, a development which has resulted in a number of passive providers and mutual funds increasing their exposures to both countries. Saudi Arabian stocks were added to the MSCI Emerging Market and the MSCI ACW indices in 2019 while FTSE Russell incorporated the country onto its global equity index series in 2020. Foreign holdings of listed equities now total $60.9 billion in Saudi Arabia, a significant increase since 2015.1
Meanwhile, Kuwait also joined the MSCI Emerging Markets Index in 2020, in what lead to an additional $3.1 billion of foreign capital moving into the country.2 These inclusions come almost seven years after both the UAE and Qatar were upgraded to Emerging Markets status by MSCI.
Liberalisation and Market Enhancements Drive Inflows
The decision by major index providers to add Saudi Arabia and Kuwait to their benchmarks is a reflection of the positive market reforms which these countries have adopted over the last few years. Since first opening up its capital markets to foreign investors six years ago, Saudi Arabia’s regulator – the Capital Market Authority [CMA] – has continued to ease restrictions on inward investment on both the Tadawul, the country’s main stock exchange and Nomu, its parallel equity market.
Whereas previously, qualified foreign investors [QFIs] could only access the local Saudi Arabian market if they had at least $5 billion in AUM [assets under management], this threshold has since been revised downwards to $500 million. The CMA has also stepped back from authorising QFI applications, and is delegating the task to AAPs [authorised assessing person] – namely custodian banks, in what is helping to expedite the QFI approval process. “In addition, Saudi Arabia has eased its foreign ownership restrictions and simplified investor disclosure requirements. By doing this, the country is aiming to generate greater foreign interest in local IPOs [initial public offerings] and secondaries,” noted Topbas.
GCC Countries are also introducing more investment tools for foreign institutions by creating markets for securities lending and borrowing, and derivatives. Investor protections have also been strengthened through the establishment of central counterparty clearing houses [CCPs] in the region. The Tadawul in Saudi Arabia not only launched a derivatives market but it also established a CCP – known as Muqassa. Similarly, regulators in Kuwait and the UAE [Abu Dhabi Exchange and Dubai Financial Market] are all launching their own CCPs. By setting up CCPs, these markets are demonstrating their commitment to best practices.
Other liberalising measures include Kuwait’s decision to harmonise its settlement cycle for local/foreign investors to T+3, and its introduction of delivery versus payment. These progressive initiatives are playing an integral role in encouraging foreign investment into MENA - facilitating greater diversification and deepening market liquidity.
The Improvements Keep Coming
Historically, one of the main challenges precluding investment into MENA was the absence of harmonisation, especially around market access and account openings. The account opening processes in individual MENA markets were often quite different, creating inefficiencies for foreign investors. Nevertheless, this is changing as account openings – along with other processes – are becoming less complicated than what they once were as a number of MENA markets adopt internationally accepted best practices. This is ultimately leading to reduced fragmentation.
The pandemic has also prompted MENA markets to embrace digitalisation and move away from manual, paper-based processes in activities such as account openings, corporate actions and proxy voting. Not only does this reduce the risk of errors happening, but it makes it much more efficient for investors when entering the market. It is widely believed that these digital changes will stay in place post-pandemic.
Corporate governance has also undergone marked improvements in MENA, having traditionally been an area of concern for many foreign investors in the region. “Enhancements to governance in MENA are being driven by foreign investors, many of whom are taking a growing interest in matters related to ESG [environment, social, governance],” noted Topbas.
Institutions – especially those based in the EU and UK – are coming under mounting pressure from regulators [along with their own underlying investors] to integrate ESG into their investment processes. For example, the UK and EU both now require institutions such as asset managers to disclose how they incorporate ESG into their investment and risk management activities. This is having a downstream impact in terms of how they invest in emerging markets such as MENA.
MENA on the Ascent
A combination of the strong return potential in emerging markets, together with ongoing market liberalisation initiatives, digital transformation; and adoption of best practices are all helping the MENA region attract greater inflows. Most significantly, these markets show no sign of slowing down with their liberalisation and digitalisation agendas. Although it is very unlikely MENA will follow the EU’s footsteps and develop standardised cross-border regulation – or even consolidate its FMIs [financial market infrastructures], the region is set to continue adopting global best practices to the benefit of international investors, which in turn will continue attracting portfolio investment flows.
1Institutional Investor [September 14, 2021) The transformation of Saudi Arabia’s stock exchange offers compelling opportunities for investors
2Arabian Business [ November 30, 2020) Boursa Kuwait sees $3.1 billion inflows after MSCI upgrade