Kuwait may not be the first market to spring to mind when it comes to the launch of a brand new Exchange Traded Fund or ETF. Yet investors need to take a closer look at the underlying Kuwaiti market to fully appreciate how an ETF launch really captures the recent dynamic growth of this Gulf country.
The KMEFIC FTSE Kuwait Equity UCITS is one of the latest ETFs to hit the London and Italian stock markets and brings with it the opportunity for investors to get exposure to the growth of some of the leading companies in Kuwait and the broader Kuwaiti economy.
The underlying index for this ETF is the FTSE Kuwait All-Cap 15% Capped Index, which tracks 15 of the leading companies listed on the local stock exchange, which have a combined market cap of more than $14 billion.
Part of the catalyst for the launch was Kuwait’s inclusion as an emerging market in the recent FTSE Russell annual country classification review, which has seen Kuwait provided a global allocation of 0.9%, almost on a par with Argentina. Its reclassification by FTSE Russell came in recognition of recent enhancements made by Capital Market Authority of Kuwait and Boursa Kuwait.
Why buy a Kuwait ETF, and why now?
While the growth and gradual opening of the neighbouring Saudi economy has been attracting some attention from international investors, Kuwait has been flying under the radar. But the country is focused on a massive business and infrastructure program, termed the New Kuwait Vision 2035. This is a strategic plan to move the Gulf state away from its reliance on the dominant petrochemical industry, to create a much more mature and diversified economy.
The government also wants to reduce its role in the implementation of development projects from around 90% to less than 40%. This requires that private capital, including the companies in the Kuwait All-Cap index, will need to player a bigger role.
Privatisation, the development of a knowledge-based economy, and a favourable environment for international business are all considered essential components for this revolutionary project.
The projects involved are not restricted to just the finance or business arenas, with some cultural and social initiatives underway, including an opera house and a new hospital. A free trade zone, the Silk City, known locally as the Madinat al-Hareer, will stretch across 250 square kilometres and include several major infrastructure projects, among them a railway terminal. It is planned that Silk City will play an important role in China’s One Belt, One Road ambitions in the Middle East.
The new ETF should not be seen as an energy play: it is intended to tap the growth in listed companies that have substantial exposure to the fundamental changes occurring in Kuwaiti society. There is only one oil stock in the index (Boubyan Petrochemical Co); the rest include banks like Ahli United Bank and National Bank of Kuwait, Humansoft Holding, which runs the American University of the Middle East, and Mobile Telecommunications Co KSC.
“These stocks represent the top end of the market,” explains Abdullah Albusairi, Assistant Director at the ETF’s sponsor, Kuwait & Middle East Financial Investment Company. “Banks have always done well, but the inclusion of a telecoms firm is important as Kuwait enjoys one of the highest levels of mobile penetration in the region.”
A tradeable GCC investment
The ETF’s launch comes as a time when the government of Kuwait is working to open up and diversify the economy, with more emphasis on foreign investment than previously. It is already a wealthy country, and as long as oil is trading above $47/bbl, it has surplus cash to hand and is unsurprisingly ranked as the fourth richest country in the world. But the recent thinking has been to find ways to diversify the economy internally, not to simply invest some of that oil surplus abroad, and to do much of that with private capital.
Kuwait’s stock market is still relatively small compared, for example with that of Saudi Arabia. It probably still requires further diversification away from the banking sector, but its rapid evolution in recent months points towards further progress. For investors the KMEFIC FTSE ETF represents a solid alternative to allocating to stocks in Saudi or the United Arab Emirates.
The reclassification by FTSE Russell is very significant, as it represents an important stamp of approval for the country’s markets and regulatory infrastructure, enabling the launch of an investment product of this type, and thereby providing investors with the ability to get exposure to this market through a listed fund in London and Milan.