Up to 99% invest in India
Liquidity a chief concern
Global emerging market funds are underinvested in Gulf equities, research shows, with experts attributing fund managers’ wariness to low turnover in all but a few regional stocks as well as time and resource constraints.
Such funds usually benchmark their performance against the MSCI Emerging Markets Index but, unlike exchange-traded funds, do not have to replicate index weightings exactly so can have more or less of a particular market or stock.
This leads to significant variance. Only 63 percent of global emerging market (EM) equity funds hold UAE stocks, according to research by Iridium, an investor relations consultancy.
These funds, which hold about $435 billion in assets, have even less exposure to other Gulf countries. Fifty-seven percent own Saudi Arabian stocks, 20 percent hold Qatari equities and 11 percent are invested in listed Kuwaiti companies.
That compares with 97-99 percent for India, China and Hong Kong, Taiwan, Brazil and South Korea, according to an Iridium report released this month. It was published before Israel’s surprise attack on Iran on June 13, which has sparked a conflict between the two countries.
“Those EM funds that are invested here are probably still at least 50 percent underweight versus the Gulf’s representation on emerging market indexes,” says Marwan Haddad, managing director and Mena equities lead at Azimut Group, which has $110 billion of assets under management.
“Emerging market investors’ core focus is the likes of South Korea, China and India. If they want to invest elsewhere, they’re looking for two things above everything else: stock market liquidity and earnings growth.”
EM funds’ focus on the major economies of South and East Asia is understandable, with China, India, Taiwan and South Korea representing 76 percent of the MSCI emerging markets index between them.
Among Gulf countries, Saudi Arabia’s weighting is the biggest at 4.4 percent as of early 2024, followed by the UAE (1.3 percent), Qatar (0.9 percent) and Kuwait (0.8 percent).
“As a fund manager you have to dedicate time, research and manpower to each market in which you want to invest,” says Ashish Marwah, chief investment officer at Abu Dhabi’s Neovision Wealth Management.
“Compared with major emerging markets, the Gulf is still small, so I’d interpret the current level of participation by emerging market funds here as good news. The proportion of funds investing here will increase as the markets grow.”
Liquidity – sufficiently large trading volumes to enable the swift purchase and sale of stocks – is fund managers’ chief concern when deciding where to invest, according to Haddad.
“Increasing liquidity is a multistage process that takes time,” he says. “First you need to attract Mena funds, then you target frontier market investors. Next it’s regional EM funds and finally global EM funds.”
Typically, Mena fund managers will invest in stocks that trade a minimum of about $2 million of shares daily. Frontier funds require daily trading of $5 million, while regional EM funds have a threshold of $20 million. Global EM funds need a stock to average at least $50 million in daily trading, explains Haddad.
“It’s probably only [Saudi Arabia’s] Al Rajhi Bank that is investible at that threshold, while for $20 million of daily trading there are perhaps 3-4 other Gulf stocks that meet such criteria,” he says.
Fund managers’ secondary priority is earnings growth.
“If companies are making money, people are willing to buy their stocks,” says Haddad. “When people buy them, the companies’ market caps rise. When they have a larger market cap, they are more liquid. It’s a virtuous circle.”
The absence of Qatari and Kuwaiti stocks from most global emerging market funds’ portfolios is due to the small size of their economies and populations.
“As a fund manager interested in the region, unless I find a unique business model in Kuwait or Qatar, I have no incentive to invest there,” adds Marwah.
“You don’t need to invest in Kuwait and Qatar to play the Gulf because regional markets are highly correlated. So, if you want exposure to the Gulf, you’ll buy Saudi Arabia and UAE stocks first.”
