*Steve Johnson from London
Gulf states are in the process of achieving the second victory in their journey to becoming investment assets within the mainstream.
In June, the Morgan Stanley Composite Index announced that Saudi Arabia would join its emerging market share index next year, which measures around $ 1.5 trillion in global assets after Qatar and the UAE, which join in 2014. Kuwait is expected to enter in 2020.
Now, JPMorgan has begun consultations on the accession of the Quartet, as well as Bahrain, to its very influential group of emerging-market sovereign wealth-weighted equity indices.
"If Morgan Stanley has to go ahead with the accession of these countries, this could prove to be a major boost to the region," said Abhishek Kumar, head of emerging markets at State Street Global Advisors.
It was estimated that this move could lead to negative fund inflows of about $ 45 billion, equivalent to 30 per cent of the value of sovereign bonds in the Gulf.
It is based on $ 363 billion estimated by Morgan Stanley that it is being measured according to indicators.
"This may reduce the cost of financing and may eventually lead to increased regional growth," Kumar said.
With the exception of Oman, Gulf states have been excluded from joining JPMorgan's emerging market bond indices because their per capita GNP is above the $ 18,769 ceiling, and sometimes much higher, according to the World Bank.
To overcome this hurdle, JPMorgan proposes in its consultation document that was shown to the Financial Times to take additional action to accept countries where the price of a wide basket of goods and services is less than 60 per cent of its US price.
This measure excels the introduction of all the Gulf States, but it does not seem to mean that any other country is in the process.
"Our main concern is consistency and predictability of the rules," said Bryan Carter, head of emerging markets at BNP Paribas for Asset Management.
JPMorgan declined to speak to the Financial Times, but the US bank can indicate from the fact that most investors seem to support the proposal to include Gulf States.
Even Carter, who currently has large holdings of Gulf bonds "almost all", argues that these countries are clearly "emerging markets" and that they are currently excluded only for "technical" reasons.
Jean Dean, head of research at Ashmore Group that invests in emerging markets, welcomed the idea of adding more countries to the benchmark emerging market index, as the most diversified index is less volatile.
"Saudi bonds, for example, tend to be" a safe haven in the emerging markets, like China to some extent, because they are very different from Venezuelan bonds, for example, "he said.
The price index used by JPMorgan to justify Gulf countries' accession "holds a part of the spirit of emerging markets," Dean said.
"It is tied to the level of development," he said, "This gap (with price levels in the developed world) is beginning to fade with the progress of the countries."
Claudia Calik, Emerging Markets Securities Manager at M & G Investments, noted that some Gulf countries have "amazing entry levels, but that does not necessarily mean from the market point of view that they are developed countries."
"From a business perspective, most emerging market investors are looking for those countries anyway, they are countries being removed from emerging market offices, so that's certainly reasonable," she said.
The inclusion of the Gulf States will have a significant impact. According to the consultation document, the five potential candidates are likely to have a total weight of 12.3 per cent in JPMorgan's hard-currency sovereign debt universe.
This is much higher than the current level enjoyed by Mexico, the only larger country in the index, with a weight of 5.1 per cent.
This would raise the weight of the Middle East region threefold, from 6 per cent to 18 per cent in the index, which is higher than that of Asia (17 per cent) and Africa (11 per cent), but less than Latin America (32 per cent) and Europe (22 per cent).
According to Calik, from M & G Investments, the proposed relative weight of 18 per cent will probably rise more in the coming years because the Gulf states account for about 25-30 per cent of the total issuance of sovereign bonds in hard currency in emerging markets since 2016.
"On the basis of the movement in the next phase, given the financial deficits, you will see a large amount of issuances over the next few years, so the relative weight of these countries will rise," she said.
"This makes the index more closely linked to the price of oil, considering that we have originally Russia, Mexico, Malaysia and a number of smaller African oil producing countries," she added.
A decision is expected in the third quarter, but Dean says, "From my point of view, the issue is over."
