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Funds & Falcons | Opportunities in an Emerging Kuwait | KUW8

Kuwait Overview: A Small Country with a Big Future

While small in terms of area (only 6,880 square miles [1]) Kuwait is one of the worlds’ wealthiest countries with the International Monetary Fund ranking it 7th in the world for GDP per capita – (~US$69,000 [2])

Before the discovery of the oil, Kuwait served as a centre of pearl, wood, spice and date trading between India, the horn of Africa, the Western Middle East and the Eastern Mediterranean rim countries. Up until the expansion of Japanese pearl farming in the early 20th Century, Kuwait had one of the largest sea fleets in the Gulf region and a flourishing pearling industry.

Yet in the few decades since the discovery of the world’s 7th largest oil reserves [3], Kuwait has been transformed into one of the worlds’ wealthiest countries with its vast sovereign wealth fund -the Kuwait Investment Authority (KIA), managing an estimated US596 Billion of assets.

Now, in response to an age of declining energy prices and global regulatory initiatives focused on reducing carbon dependency, Kuwaiti policy makers, like many of their regional peers, have embarked on an economic diversification and development plan designed to reduce the country’s dependency on oil and transform Kuwait into a regional commercial and financial hub.

This economic transformation provides an opportunity for investors to benefit from expected growth in the non-oil segments of the Kuwait economy.

The early stages of this transformation have been seen recently in the improved structure and accessibility of Kuwaiti capital markets. These changes have resulted in Kuwait being upgraded to “Emerging Market” status by the world’s largest index provider, FTSE Russell [4] (Sept 2018). Until that point, Kuwait had been an “Unclassified” country and was consequently absent from a significant proportion of emerging market and frontier market investment funds. MSCI, the world’s second largest index provider is also considering including Kuwait in their Emerging Market indexes in the first half of 2019 as part of their country classification review [5]. 

Kuwait: Quick Facts:

  • The name “Kuwait” is derived from Arabic word “Kut”, meaning “fort”
  • Kuwait was the first Gulf country to have established a constitution and parliament
  • The KIA (Kuwait Investment Authority) is the world’s oldest sovereign wealth fund
  • The falcon is the Kuwaiti national bird
  • There are no railways in Kuwait
  • Kuwait has no permanent rivers and lakes, which means that it has no fresh-water sources above the ground
  • In 2006, Kuwait became the first country to introduce the sport of camel racing, with remote controlled robot jockeys

Gulf Economic Trends:

2018 was a bright year for the Gulf Cooperation Council (GCC) Region. While global equities faltered significantly and broad emerging markets (measured by the FTSE Emerging Index) dropped by 13% [6], the GCC region outperformed its global peers with a return of 16.1% – the best yearly growth in five years - as per the FTSE GCC Saudi Inclusion Index.

GCC equity markets performance proved to have low correlation to global markets as they seemingly moved in opposite directions throughout the year. The region was buoyed by country classification upgrades to Emerging Market status for Saudi Arabia and Kuwait- upgrades which saw interest in blue-chip stocks in both markets significantly increase.

Trends in the oil market which is of particular interest to the region had a positive impact on both government and the corporate sector. The year on year increase in oil prices in 2018 saw decreased reliance on external finance to support state spending plans despite the decline of oil prices at the end of the year. Deficits in the region are set to reduce significantly as compared to the previous year. As per the IMF [7], deficits are forecasted to reduce to USD $14bn which would result in almost 80% reduction to 2017 budget deficits.

The current price of oil is well within comfort range to maintain a positive trade balance as in 2019 Kuwait is forecasted to maintain a 11% surplus - Kuwait boasts one of the lowest breakeven price of oil globally at USD $47.37. The positive trade balance is projected to maintain a surplus for the coming 5 years especially with significant efforts to boost non-oil revenues.

The most recent draft budget for FY 2019/2020 was presented for parliamentary approval in January 2019. The budget presented an expansionary outlook with spending slated to increase by 4.7% YoY to KWD 22.5 billion.  Oil revenues are projected to grow to KWD 13.3 billion (USD 43.8 Billion) up 13.7% from last year’s budget. The budget assumes an average price of oil of $50, which would be significantly under market projections especially considering the January production cuts [8].

The construction budget increased by 14.7% YoY signalling a very positive indicator for infrastructure projects.

Kuwait Minister of Finance, HE Dr Nayef AL Hajraf commented,

“The country is currently instituting a structural fiscal and economic reform program, and control of expenditures is a necessary precondition for these reforms to succeed over time. Yes, the global economic outlook is improving, and the price of oil is rebounding, however that should not and will not steer us away from our path for reform. In fact, it makes our resolve for reform grow even stronger.

“We believe that reform starts with curbing spending, while maintaining a healthy rate of capital expenditures on infrastructure and minimising the impact of our fiscal reforms on citizens.

“Kuwait is in a unique financial position that enables us to introduce reform gradually, and in a controlled and responsible manner within a legislative and public environment that encourages a lively debate of the issues and the opportunities.” [9]

With oil prices trending upwards at the start of 2019, combined with further news of projected country classification upgrades in Kuwait, the future seems bright for the region.  

Kuwaiti Development Vision:

Kuwaiti policy makers, like many of their regional peers, are responding to an age of declining energy prices and economic de-carbonisation through a series of economic diversification and development plans designed to reduce dependency on oil revenues, transforming Kuwait into a regional commercial and financial hub.

A key strategic initiative is the “New Kuwait” development plan - designed to transform Kuwait’s economy through more than 150 strategic programmes [10] ranging across public administration reform, economic diversification, skills and education, urban development, tourism, technology, transport healthcare and sustainable energy. Through these projects, Kuwait aims to reduce dependency on oil revenues, enhance sustainability and attract more foreign investment and foreign ownership.

Examples of infrastructure developments already underway or near completion include the Sheikh Jaber Al-Ahmad Al-Sabah Causeway (SJSC) Project - the largest transport infrastructure endeavour in Kuwait. Spanning the Kuwait Bay, the 36-km Subiyah Link links the capital Kuwait City with the northern Subiyah area. Its main cable stayed bridge, is scheduled for completion in 2019.

Kuwait is also upgrading airport infrastructure with a new Foster & Partners designed T4 terminal for the national carrier, Kuwait airlines and a new KD 1.3 Billion T2 general passenger terminal with an annual capacity of 25 million passengers [11]. (pictured below)

This increase in passenger handling capacity is partly due to the expanding tourism industry in Kuwait. According to the World Travel and Tourism Council (WTTC), tourist arrivals are expected to increase from 270,000 in 2014 to 440,000 by 2024, with foreign corporations providing the much-needed additional hotel space. The Four Seasons has recently opened at the Burj Alshaya Centre, with Hilton, Mercure and Grand Hyatt under construction and expected to open by 2020.

Energy market diversification is also occurring, including the construction of 25,000 megawatts renewable energy complex located at Shagaya, Jahra, Kuwait.

In one of the largest developments of 2018, Kuwait and China signed a memorandum of understanding in November of 2018, forming a strategic partnership to further the development of the Silk City in Kuwait which is a proposed 250 KM squared area in the Subiya area. The $86bn project is designed to help promote Kuwait to a global investment hub. The MOU also includes development plans for five islands off the coast of Kuwait.

Developments have also occurred in the infrastructure of Kuwaiti capital markets.  In mid-December, 2018 the Ministry of Commerce and Industry announced changes that allow for foreign ownership of domestic bank shares.

Under the reform, foreign investors will now be able to hold up to 5% of the capital of a Kuwaiti bank, with investors able to increase participation above this threshold with authorisation from the Central Bank of Kuwait.

The ceiling on overall foreign ownership in any single lender has been set at 49%. The move to open up the banking industry is the latest in a series of measures aimed at encouraging investment in the financial sector, including reclassifying of Kuwaiti Stock Exchange indices into three groupings – Premier, Main and Auction in April 2018.

The Transformation of Kuwait is Just Starting

With 16 years remaining to execute the Vision 2035 plans, the transformation of Kuwaiti infrastructure and economy is just beginning and the economic impact is only just being felt. As the IMF commented in January 2019, [12]

“Higher oil prices in 2017–18 lifted growth and improved fiscal and external balances [in Kuwait]. The uncertainty about their future though, as demonstrated by the recent drop [in oil price], underscores the need to reduce Kuwait’s dependence on oil and save adequately for future generations. Successfully tackling these challenges hinges on the emergence of a vibrant private sector that can create jobs for the large number of nationals joining the labour force over the next decade. Ample financial assets, low debt, and a sound banking sector allow Kuwait to undertake the needed reforms from a position of strength and at a measured pace.”

Kuwait has the commitment and means necessary to reshape its economy, transforming opportunities for local entrepreneurs and foreign investors alike. The KMEFIC FTSE Kuwait Equity UCITSETF (KUW8) provides a solution for investors seeking to participate in this growth story through a liquid and diversified exposure to one of the youngest and most dynamic Emerging Markets in the world.

Accessing Kuwait: KMEFIC FTSE Kuwait Equity UCITS ETF (KUW8)

In 2019, HANetf launched the KMEFICFTSE Kuwait Equity UCITS ETF (KUW8) with Middle Eastern asset management leader KMEFIC (Kuwait & Middle East Financial Investment Company) as main sponsor. KUW8 is a UCITS compliant ETF domiciled in Ireland, enabling investors to efficiently gain access to one of the Gulf regions’ most dynamic and rapidly evolving economies.

The fund tracks the FTSE Kuwait All-Cap 15% Capped Index, a rules-based benchmark capturing ~13 large, mid and small cap stocks listed on the Kuwait Stock Exchange main market that meet liquidity, free-float and foreign ownership criteria. These constituents represent ~56% of total Kuwaiti equity market capitalization. Index constituents are capped at 15% during a semi-annual rebalance to reduce concentration in large-cap securities.

Advantages:

  • ACCESS: Exposure to Kuwaiti securities which have previously been challenging for foreign investors to access
  • RULES-BASED: KUW8 tracks a transparent, rules-based benchmark calculated in real-time by FTSE Russell
  • DIVERSIFICATION: KUW8 caps constituents at 15% at rebalance to avoid concentration in the largest securities
  • EFFICIENT: In a single trade, KUW8 provides exposure to a diverse basket of Kuwaiti securities
  • KUW8 has low exposure to oil and gas industry – higher exposure to the entrepreneurial and capitalist elements of Kuwaiti economy
  • FLEXIBILITY: KUW8 offers a choice of settlement currency (GBP, USD, EUR)

Key Risks 1. The value of equities and equity-related securities can be affected by daily stock and currency market movements. 2. Emerging & frontier markets are subject to greater market volatility than developed markets. 3. Investors' capital is fully at risk and investors may not get back the amount originally invested. 4. Exchange rate fluctuations could have a negative or positive effect on returns.

About KMEFIC:

KMEFIC (Kuwait & Middle East Financial Investment Company) is a leading asset management and financial services company in the Middle East providing innovative investment products and services, consistently producing strong returns and increasing shareholder value.

KMEFIC was incorporated in January 1984 by The Bank of Kuwait and the Middle East (currently Ahli United Bank) and The Public Institution for Social Security-Kuwait, as equal shareholders.

In 1987, The Public Institution for Social Security, Kuwait sold its stake to The Bank of Kuwait and the Middle East (currently Ahli United Bank) to become the main shareholder in KMEFIC. KMEFIC was listed on the Kuwait Stock Exchange in July 1997.

About FTSE Russel:

A global index leader – FTSE Russell’s solutions offer a true picture of global financial markets. Choosing the right index partner has never been more important. FTSE Russell indexes are trusted by investors in every corner of the world to measure and benchmark markets across asset classes, styles or strategies. FTSE Russell is wholly owned by London Stock Exchange Group.

Download the full whitepaper "Funds & Falcons | Opportunities in an Emerging Kuwait" here

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