06-Nov-2018
Kuwait Strategy - Buy ahead of FTSE phase two on 20 Dec-18 and MSCI in June-19
OW Kuwait call still has legs, cUSD450mn inflows on 20 Dec
We remain bullish on Kuwait due to i) a stable macro outlook; ii) Index-inclusion driven inflows, potentially lasting until May 2020; and iii) low ownership by regional and global funds relative to peers. We have been OW on Kuwait from 2 Mar 2017, since then the MSCI Kuwait index has returned 21.5% outperforming EM (+10.9%), FM-x-GCC (+3.7%), FEM (+3.5%), MENA (+18.8%), and MENA-x-KSA (-3.2%). On 20 Dec, FTSE Kuwait constituents will see an additional USD450mn inflows, we expect no changes to the current list, except the potential addition (announcement on 23 Nov) of INTEGRAT KK (USD8mn, 8x ADVT). MSCI Kuwait is trading at a PEG ratio of 1.1x, which is in line with MSCI EM, but at a premium to the MSCI Frontier Emerging Index’s 0.9x. A Kuwaiti premium is justified considering i) safer USD returns from a FEM context due to low currency risk; and ii) one of the lowest country risk premiums, with 5-year CDS spreads at 65bps vs 313bps average for other major frontier markets.
Add GBK KK to Top 20 list replacing ORDS QD
We keep NBK KK, MEZZAN KK and HUMANSFT KK in our MENA Top 20 list. However, we replace ORDS QD with GBK KK. Despite the fact that ORDS QD offers value, there are still no signs of a recovery in Indonesia and there is insufficient visibility provided by management. We fear Indonesian-related issues could drag on for a while, potentially limiting visibility on dividends. GBK offers growth potential after several years of restructuring, it is also the cheapest bank in Kuwait after BURG KK. In addition to fundamental drivers, we see GBK as a potential addition to FTSE in March 2019 (+USD42mn expected, 14x ADVT). Moreover, GBK is already part of MSCI Kuwait, and should join MSCI EM in May 2020 (+USD78mn inflows) if Kuwait is upgraded in June 2019 (which we see as highly likely). Non-local ownership in GBK is currently only USD42mn vs. potential inflows of USD120mn by May 2020.
Three trading calls on Kuwait for the coming period
We issue three trading calls on Kuwait: i) Long a basket of key MSCI/FTSE beneficiaries weighted by flows. Those looking for a hedge should short MSCI Qatar; ii) Long GBK KK / Short QNBK QD as a potential FTSE March 2019 inclusion, and a play on MSCI country classification in June 2019; and iii) long AUB KK / Short QNBK QD as a potential FTSE March 2019 inclusion (USD93mn, 22x ADVT). Furthermore, the potential merger with KFH KK would mean that AUB KK would also benefit from MSCI EM inclusion. Our Trading calls have delivered an absolute return of 24.4% on average, and alpha over MSCI Arabian Markets Index of 20.6% and 25.8% over MSCI EM.
Mohamad Al Hajj
We remain bullish on Kuwait due to i) a stable macro outlook; ii) Index-inclusion driven inflows, potentially lasting until May 2020; and iii) low ownership by regional and global funds relative to peers. We have been OW on Kuwait from 2 Mar 2017, since then the MSCI Kuwait index has returned 21.5% outperforming EM (+10.9%), FM-x-GCC (+3.7%), FEM (+3.5%), MENA (+18.8%), and MENA-x-KSA (-3.2%). On 20 Dec, FTSE Kuwait constituents will see an additional USD450mn inflows, we expect no changes to the current list, except the potential addition (announcement on 23 Nov) of INTEGRAT KK (USD8mn, 8x ADVT). MSCI Kuwait is trading at a PEG ratio of 1.1x, which is in line with MSCI EM, but at a premium to the MSCI Frontier Emerging Index’s 0.9x. A Kuwaiti premium is justified considering i) safer USD returns from a FEM context due to low currency risk; and ii) one of the lowest country risk premiums, with 5-year CDS spreads at 65bps vs 313bps average for other major frontier markets.
Add GBK KK to Top 20 list replacing ORDS QD
We keep NBK KK, MEZZAN KK and HUMANSFT KK in our MENA Top 20 list. However, we replace ORDS QD with GBK KK. Despite the fact that ORDS QD offers value, there are still no signs of a recovery in Indonesia and there is insufficient visibility provided by management. We fear Indonesian-related issues could drag on for a while, potentially limiting visibility on dividends. GBK offers growth potential after several years of restructuring, it is also the cheapest bank in Kuwait after BURG KK. In addition to fundamental drivers, we see GBK as a potential addition to FTSE in March 2019 (+USD42mn expected, 14x ADVT). Moreover, GBK is already part of MSCI Kuwait, and should join MSCI EM in May 2020 (+USD78mn inflows) if Kuwait is upgraded in June 2019 (which we see as highly likely). Non-local ownership in GBK is currently only USD42mn vs. potential inflows of USD120mn by May 2020.
Three trading calls on Kuwait for the coming period
We issue three trading calls on Kuwait: i) Long a basket of key MSCI/FTSE beneficiaries weighted by flows. Those looking for a hedge should short MSCI Qatar; ii) Long GBK KK / Short QNBK QD as a potential FTSE March 2019 inclusion, and a play on MSCI country classification in June 2019; and iii) long AUB KK / Short QNBK QD as a potential FTSE March 2019 inclusion (USD93mn, 22x ADVT). Furthermore, the potential merger with KFH KK would mean that AUB KK would also benefit from MSCI EM inclusion. Our Trading calls have delivered an absolute return of 24.4% on average, and alpha over MSCI Arabian Markets Index of 20.6% and 25.8% over MSCI EM.
Mohamad Al Hajj