Kuwait has long been nicknamed the Sleeping Giant of the Gulf, and it is not exactly intended as a compliment. Kuwait is considered one of the least interesting of the Mideast regional economies and has done little to attract foreign investment. But that reputation might be set for a change. Kuwait’s stock market is being considered for a bump-up to emerging markets status by major index providers, and that would be a significant reclassification within the world of investors. Index funds tracking emerging markets benchmarks, and active fund assets benchmarked against emerging markets indexes, are far larger in size and popularity than frontier markets portfolios.

An employee of the Kuwait Oil Company (KOC) looks at the Gathering Center No.15 of al-Rawdatain field, 100 kms north of Kuwait City. Yasser Al-Zayyat | AFP | Getty Images

There are 30 exchange-traded funds tracking EM benchmarks, and the three largest ETFs tracking the MSCI and FTSE emerging markets indexes have roughly $135 billion in assets between them. There are two frontier market ETFs with a total asset base of roughly $600 million. Kuwait is the largest country weight in the MSCI and FTSE frontier markets index, at over 21 percent and 19 percent, respectively. In June, MSCI said it would place the MSCI Kuwait Index under review for a potential reclassification from frontier markets to emerging markets status in 2019. Rival index provider FTSE Russell hasn't classified Kuwait historically, but starting September of this year, it will be classified as a secondary emerging market — it also has an advanced emerging market group.

What happens to stocks when index providers preview a move up

These moves up to emerging markets status could mean billions of global investing dollars for the first time being tied to Kuwait's economy as emerging markets investors and funds that track index exposure, or have their performance measured against the EM index, are forced to buy shares of Kuwait stocks. Market history shows that, in the short-term at least, the index-review process can mean momentum for stocks in the market up for reclassification. Here are some recent examples. Argentina and Saudi Arabia went through similar emerging markets index reclassifications that started last year and resulted in official upgrades in June. The Saudi stock market was one of the top-performing equities markets around the globe during that process and has outpaced most of the globe this year as well, though there are multiple reasons — oil prices have been rising strongly, and the economic reforms being promoted by the Saudi Crown Prince have contributed to investor confidence. Argentina shares have suffered recently, but its stocks were strong performers in 2017 — it was the No. 1 country stock market in the world last year. Kuwait has the oldest stock exchange in the Gulf, and several of the companies that trade on it are multinational in scope and would benefit greatly from reclassification, said Kristian Coates Ulrichsen, Fellow for the Middle East at Rice University’s Baker Institute. Trading volume and price action in Kuwaiti stocks has picked up in 2018. Some of the top Kuwait exchange-listed stocks in frontier markets indexes have been on a strong performance run, including Kuwait Finance House and Mobile Telecommunications, 13 percent and 26 percent, respectively, between June and July. The relatively small size of the market overall, and its limited liquidity, also contributed to big run-ups in stock prices since the June news. But any short-term pop in Kuwaiti stocks based on investors getting ahead of the index moves doesn't reflect a very large hurdle that will remain for Kuwait's economy: Its massive public-sector reliance on oil, and its lack of investment in the private sector, has led to a series of large budget deficits.

An oil-heavy economy in need of change

Kuwait’s economy, like much of the Middle East, is heavily reliant on oil exports. It is home to 6 percent of the world’s crude-oil reserves, or more than 100 billion barrels. Kuwait has the highest percentage of GDP tied to oil among OPEC nations. Ninety-two percent of export revenue and 90 percent of the government income is reliant on oil. The private sector is expected to grow between 3.5 percent and 4 percent between 2018 and 2021. But the lack of diversification in its economy makes it hard for corporations to find employees and bridge the wide gap between private (36 percent) and public (74 percent) employees. Kuwaiti nationals are guaranteed public-sector employment as part of the oil wealth distribution, while most private-sector employees are migrant workers. As in the case of Saudi Arabia, the Kuwaiti government has released a broad plan for economic development beyond oil, its Kuwait Visions 2035 plan, which aims to increase foreign direct investment and streamline the process for foreign corporations seeking to operate in the nation. The country's stock exchange, the Boursa Kuwait, has also made recent changes to encourage more listings and investment.

OPEC oil and GDP Country OPEC petroleum exports ($B) GDP 2016 ($B) Petroleum exports as % of GDP Kuwait 41.0 110.6 37.08% Gabon 4.0 14.3 28.02% Libya 9.0 33.6 26.81% Angola 26.0 95.8 27.13% Iraq 44.0 166.3 26.46% Saudi Arabia 134.0 639.6 20.95%