Gulf not yet ripe for MSCI emerging market status

The Gulf isn't yet ripe for emerging market status in MSCI indexes. An upgrade of Qatar and the United Arab Emirates from the so-called frontier category - which includes markets like Kazakhstan and Pakistan - would be a huge boost at a time when investors in the Middle East are searching for safe havens. But it doesn't look like either Gulf market has done enough to deserve the multi-billion dollar promotion.
MSCI is an influential index complier and has twice reviewed and rejected Qatar and the UAE for an upgrade. All the main Gulf markets are currently classified as frontier, with the exception of the region's giant Saudi Arabia which is barely open to foreigners and isn't included in either index.
Emerging market status would help Qatar and the UAE attract a total of $3.8 billion in new money from global emerging market funds, according to EFG-Hermes. And that estimate might be conservative given that both markets are trading below the average multiple for the Middle East and North Africa region of 10.9 times earnings in 2011. The extra liquidity could also reduce the number of UAE stocks like ports operator DP World and Dana Gas seeking additional listings in London.
True, Qatar and UAE might only make up less than one percent of the total weighting in the MSCI emerging markets index. But the status is critical for the region and its external investors. The revolution in Egypt highlighted that investors attributed huge importance to the country's inclusion in the index despite accounting for less than 0.5 percent of it.
Yet Qatar and the UAE have been slow to make changes required ahead of the June date when MSCI will reassess the issue. Qatar still needs to increase its foreign ownership limit, currently stuck at 25 percent of shares with some exceptions. Some big UAE stocks like telecom operator Etisalat remain off limits. Meanwhile, the country is yet to get its new settlement system for equities up and running.
The volatile regional political landscape shouldn't influence whether or not emerging market status is awarded. Qatar and/or the UAE could still be upgraded if they move quickly. They should not be handicapped by the shortcomings of neighbours. But with the clock ticking, investors won't have long to assess any new changes and that means it may already be too late. The combination of factors could be enough to keep the Gulf waiting on the frontier for yet another year.