Funds & Falcons | Opportunities in an Emerging Kuwait | KUW8
Overview: A Small Country with a Big Future
While small in terms of area (only
6,880 square miles ) 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 )
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 , 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 
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 .
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% ,
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 , 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 .
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
“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.” 
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 
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
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.
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 . (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
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, 
“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
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.
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
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
- ACCESS: Exposure to Kuwaiti
securities which have previously been challenging for foreign investors to
- 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.
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.
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