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Capital Markets

Indexing: The final frontier

This time last year – and the year before that – a great deal of discussion about Qatar concerned its likely ascent from the MSCI’s frontier index to its emerging markets index. Both Qatar and the UAE had been on MSCI’s watchlist for upgrade to the more senior index, and were widely expected to graduate.

Neither did. But they remain on the watchlist, so as we enter a new year, the debate will liven up again. Will 2013 be the year? And what’s the impact if it makes the step?

In terms of the impact, Euromoney reported in May 2011 estimates that Qatar would take up 62 to 100 basis points of the MSCI Emerging Market Index if included, equating to $2.5 billion to $4 billion of capital coming into Qatar based on the amount of institutional capital that tracks the index, even without counting the emerging markets funds that loosely track it. Those numbers still look about right today.

So what has to change for inclusion this time? MSCI is quite clear about it. "The issue around the very low foreign ownership limit levels imposed on Qatari companies is expected to be the only remaining impediment to the reclassification of the MSCI Qatar Index to Emerging Markets," MSCI says. "The MSCI Qatar Index should meet all requirements for inclusion in the MSCI Emerging Markets Index, provided the false trade mechanism recently introduced on the Qatar Exchange is successfully tested over time."

The foreign ownership limit is not something MSCI is going to budge on, as it is a big impediment for international institutional investors, limiting the number of shares available to them.

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