For years, the Persian Gulf has been off-limits to foreign investors. Oil money created in the Gulf flowed out into foreign investments, but international investors had no way of pushing money into the region to fund development and capture opportunities.
That is changing rapidly. With the region undergoing a surge in development - and particularly in financial development, with major investment banks like Goldman Sachs and Lehman Brothers establishing large, permanent offices in places like Dubai - the markets are slowly opening up to the international investing community. As is often the case, indexing is leading the way.
The market took a huge leap forward this year, when both MSCI and Standard and Poor's launched index families tracking the performance of companies in the Gulf Cooperation Council (GCC) region. Joining Dow Jones, already established in the area, both MSCI and S&P said that their products were a first step in opening a market that hae traditionally been closed to foreign investors. The indexes, they said, would at least show investors the opportunities available in the space, and get them excited about a market that (until recently) had been on a long, sustained bull run.
The MSCI and S&P indexes were designed to be investable, but only on a local and regional level. There are enormous foreign ownership restrictions in the region, making truly international investable indexes difficult.
Last week, however, FTSE and the Dubai Financial Exchange (DIFX) said they had found a way to work around those problems, announcing the launch of what they're calling the "first GCC country tradable indices." The indexes are designed to support ETFs and other financial products that will be tradable on an international scale; FTSE even envisions index-based derivative products, which would be a first in the region.
"FTSE has a long-standing and proven track record for working with exchanges in developed and emerging markets around the world," said Nasser Al Sha'ali, Chief Operating Officer of the DIFX. "With FTSE, we have created the first phase of a viable family of indices that we hope will build bridges between markets."
The internationally tradable indexes are limited, covering just Kuwait and Qatar, the two countries with the most open policy to foreign investment. The FTSE DIFX Kuwait 15 Index covers the top 15 eligible companies in Kuwait, while the FTSE DIFX Qatar 10 Index coves the top 10 companies from Qatar. Companies will be chosen for the indexes based on full market capitalization, without any free-float or foreign ownership considerations, to prevent the possible distortions that take place in a region where cross-ownership and private-public partnerships are the rule rather than the exception. After the constituent companies are selected for the index, however, the weightings are adjusted by free float and foreign holding requirements to make them investable on broad basis.
There is no word yet on when products tied to the indexes will launch.
Note: Investors looking for energy exposure from these indexes will be disappointed. Oil companies are nationally owned in the region, and thereby excluded from the indexes, which are dominated instead by banks and telecom companies.
More information from FTSE is available here.