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MENA Market Conditions Favorable for Foreign Investors

Qatar and UAE markets have posted significant gains since the release of the provisional list by MSCI in June 2013. Having improved in both size and liquidity, many stocks from these two markets can now be part of the MSCI EM index. On re-running the MSCI selection filters (six in total), Deutsche Bank research identifies up to 27 stocks that satisfy the criteria - 15 stocks from Qatar and 12 from UAE, up from 9 and 8, respectively, from the original provisional list.

Aleksandar Stojanovski, Research Analyst at Deutsche Bank said: "We expect the inclusion of more stocks to also drive a higher weighting of around 1.3% versus 0.95% previously, which in turn should also push more liquidity into the two markets when Qatar and UAE are officially inducted from 2nd of June 2014. Market conditions are turning favorable for foreign investors."

The first quarter of 2014 witnessed higher liquidity and more stocks revising their Foreign Ownership Limits (FOL), the two key impediments to foreigners investing in the region. "Liquidity in MENA markets is on an upward trend, with 2014 YTD average daily trading volume for UAE at 700 million+ USD, a 10-year high, and Qatar at 185 million USD, near its 2008 peak. Companies have also begun to look favorably at foreign ownership and some have increased their FOLs", Stojanovski added. In February 2014 alone, four companies (DIB, Deyaar, Mashreq Bank, UPP and Al Khaliji Bank) announced their decision to increase their respective FOLs.

MSCI will finalize the constituent list for Qatar and UAE in their May Semi-Annual Index Review (SAIR) and an official release can be expected on 14th May 2014. Following this, stocks from these two countries will be officially part of the index from 2nd June 2014, with increased market size and better liquidity compared to July 2013. When Qatar and UAE will be officially inducted into the MSCI EM index, more funds will flow into the market because these markets will then come under the purview of passively managed funds that track the EM index.

Deutsche Bank expects that the final list will have more stocks included than the 17-stock provisional list released last year. In addition to the 17 stocks that MSCI included in the Qatar (9 stock) and UAE (8 stocks) provisional list, released in June 2013, Deutsche Bank estimates that today, up to 10 additional names meet the MSCI EM inclusion criteria. Among the 27 selected stocks, 17 stocks witnessed increased foreign ownership since June 2013.  Since June 2013, Qatar has outperformed the MSCI EM index by 17 percent and UAE by 57 percent. Deutsche Bank's research team believes that this re-rating in relative market capitalization will push up their weights in the EM index once the final list of constituents is announced. With the increased market focus that comes with EM status, Qatar and UAE are able to attract strong foreign fund inflows. The two countries led the region in fund inflows last year, bringing in a total of USD 1.8 billion – of which Qatar received USD 848 million while the UAE had USD 954 million of inflows.