GCC now commands nearly 7% of EM index weight, up from zero a decade ago

The GCC has gone from having no weight in MSCI’s emerging markets (EM) index a decade ago to commanding nearly 7% today, according to Raman Subramanian (LinkedIn), MSCI’s global head of index R&D and chair of its Index Policy Committee.

The shift from retail-driven to institution-driven markets has been the cornerstone for long-term liquidity and credibility of regional stocks, Subramanian said. The UAE and Qatar were the first to join MSCI indices in 2014, followed by Saudi Arabia and Kuwait. Their inclusion fundamentally changed the way global investors view the region, putting the GCC alongside much larger economies in global benchmarks and making it impossible for fund managers to ignore, Subramanian said.

SOUND SMART- Inclusion in MSCI indices is critical because they can offer bns of USD in inflows — mostly from institutional investors, portfolio managers, and financial advisors. Investors use the indices as gauges of market performance and benchmarks against which to compare other stocks or markets and to build index-tracking funds, among other purposes. To be added as an emerging market stock, a company must first be listed in an MSCI-designated emerging market, meet minimum market cap thresholds, boast strong liquidity (with an annualized traded value ratio of at least 15%), and have no major restrictions on foreign ownership.

ICYMI- MSCI added DFM-listed real estate players Dubai Residential REIT and Union Properties to its Emerging Markets Small Cap Index during its latest rebalancing in August and removed Aramex. Meanwhile, ADX-listed Lulu Retail was added to the FTSE Mid Cap and FTSE Global All Cap indices in June, while ADX-listed Mair Group and ADNH Catering joined the FTSE Global Micro Cap Index.

Active fund managers are piling into regional assets, signaling the GCC’s growing market maturity, said Subramanian. Roughly USD 127 bn is benchmarked to GCC equities through MSCI indices, with active strategies accounting for the bulk of it at some USD 100 bn, now far outweighing passive trackers, he said. While inflows often begin passively, he noted, managers are increasingly taking selective active positions in companies across the region.

Just last month, the MSCI GCC Index had its best month in nearly two years, recording its sharpest gain in 21 months with a 4.9% rise to close at its highest level in almost three years, according to a Kamco Invest report (pdf).

The rally was led by Saudi Arabia (+7.5%), followed by Kuwait (+3.5%), Oman (+3.0%), and Bahrain (+1.0%). On the flip side, Dubai (-3.7%) led regional decliners, followed by Qatar (-1.5%) and Abu Dhabi (-0.8%). YTD, Kuwait leads the pack with a 19.5% gain, trailed by Oman and Dubai (both +13.2%).

What’s driving the rally? The seven-member bloc combines financial-heavy equity markets, global energy influence, and reform-driven non-oil economies, unlike most EMs which are either resource-driven (like Brazil and South Africa) or export-heavy (like China, South Korea, and Taiwan), Subramanian said. This mix, he explained, is why “investors no longer see the GCC simply through the lens of oil.” By offering diversification within EMs, the region is attracting investors looking for both growth and stability.

The USD pegs and the higher dividend yields paid by giants like Aramco, compared with many developed peers, also “create a compelling investment case within EM,” Subramanian argued. He added that a more diverse IPO pipeline is giving global funds reasons to invest beyond state-linked enterprises, especially as new private sector names in retail, pharma, and real estate are coming to market.

Investors also increasingly see the GCC as a single asset class, increasing their bargaining power and appeal. From a global perspective, investors are less concerned with choosing between Riyadh and Abu Dhabi and more focused on the region as a unified allocation. Saudi Arabia dominates the region’s profile with roughly 3.3% of the EM index and more than 200 listed companies, compared with around 150 in the UAE. “Saudi is also a much deeper market,” Subramanian said, but he noted that both markets are building strong IPO pipelines.

Transparency, ESG are key to bigger inflows: MSCI has been working with exchanges and businesses in the region to raise ESG standards and align them with international benchmarks, he said. He added that investors want better reporting, disclosure, and governance — and that ESG scores are becoming gateways to capital. Without stronger ESG practices, he cautioned, the GCC risks missing out on some of the fastest-growing pools of global capital.

The road to developed markets status takes more than scale: Saudi Arabia and the UAE are large economies, but Subramanian emphasized that size alone isn’t decisive. “It’s not about GDP, but about market microstructure,” he said. Clearing, settlement, and foreign ownership reforms remain essential, he said, adding that achieving developed market status could unlock bns in passive inflows, but only if reforms continue to advance.