Egypt's bourse tumbles to an 11-month low as investors fret about the possibility that it could eventually be excluded from the MSCI Emerging Market Index used by many international fund managers.
Index compiler MSCI said on Tuesday that if the Egyptian foreign exchange market worsened, preventing international investors from repatriating their funds, the country could be removed from the index.
Investors have reported problems with currency when repatriating money from Egypt, an MSCI official said.
Cairo's main index falls 5.0 percent to 4,604 points, its lowest since June 2012. It breaks below major technical support at the November low of 4,683.
"It's a complete meltdown for the market - all the negative news is hitting the market," says Mohamed Radwan, director of international sales at Pharos Securities.
"People just had enough of it, and sellers on a daily basis prove that they are making the right decision."
Egypt's bourse falls to a new six-month low after MSCI says a foreign currency shortage on the domestic market may prompt the index compiler to exclude the North African country from its emerging market index.
Cairo's main benchmark drops 2.1 percent to 4,746 points, its lowest since November 2012.
"MSCI may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation on the Egyptian foreign exchange market to worsen and result in the inability of international investors to repatriate their funds," MSCI said in a statement.
Political turmoil in Egypt triggered a flight of foreign funds and drove the currency to record lows.
MSCI last month removed EFG-Hermes and Egypt Kuwait Holding from the country index. Both stocks fall 2.9 percent and 4.2 percent respectively on Tuesday.
Qatar's bourse jumps to its highest level since September 2008 after an MSCI reclassification to emerging market status from frontier market.
The index rises 1.8 percent to 9,523 points, up 14 percent in 2013. It confirms this week's break above major technical resistance at 9,290 points, the January 2011 peak.
Heavyweight stocks which analysts believe may be included in MSCI indexes lead gains. Qatar National Bank and Industries Qatar climb 3.8 and 2.5 percent respectively (QTEL) adds 2.2 percent.
"This will only accelerate the institutional interest," says Wafic Nsouli, head of institutional equity sales at Arqaam Capital in Dubai.
"We have seen inflows for most of the year in the region. MENA has been buzzing this year and regardless of the MSCI move, we would have expected the inflows to continue."
United Arab Emirates markets surge in early trade after MSCI reclassified them to emerging market status, with blue chips that could be included in MSCI indexes leading gains.
Dubai's index rises 2.3 percent to 2,441 points. Dubai Financial Market, the Gulf's only listed bourse, climbs 5.2 percent, while Emaar Properties gains 3.7 percent.
Abu Dhabi's measure climbs 2.8 percent to 3,664 points. First Gulf Bank advances 6.9 percent.
Stock markets in the United Arab Emirates and Qatar are likely to rise after equity index provider MSCI decided to upgrade them to emerging market from frontier status, but gains will be modest since the decision was largely anticipated and the global environment is weak.
MSCI's decision is an important step in developing the Gulf as a destination for equity investment, so it may help to support markets around the region today.
HSBC estimated the upgrades, to take effect in May next year, would give the UAE a 0.33 percent weighting in the MSCI Emerging Markets Index and Qatar 0.38 percent, ranking them above Czech Republic, Egypt and Hungary.
But the amount of additional fund inflows implied by the upgrade may be small compared to the size of the markets. HSBC projected $370 million of inflows for the UAE and $420 million for Qatar; the markets' capitalisations are about $140 billion and $110 billion.
In the case of the UAE, some of that money may already have arrived, since analysts had believed the UAE had a good chance for an upgrade following reforms of its markets. Qatar's upgrade is more of a surprise, so Qatar may get a bigger boost today.
"This was not completely unexpected. But it was a 50-50 chance and I think the market has not fully priced it yet. It was more of a retail trading opportunity so far. I would expect a very strong opening," said Marwan Shurrab, fund manager and head of trading at Vision Investments in Dubai.
However, the Dubai market is already up 45.3 percent this year, Abu Dhabi 35.6 percent and Qatar 11.9 percent. So with global markets weak because of concern about rising U.S. interest rates, there may be little appetite to chase stocks higher in the short term.
Sam Vecht, portfolio manager at BlackRock, said he welcomed MSCI's decision but "it is unlikely to have any significant near-term impact on how we manage our client portfolios.
"We have been broadly positive on both of these countries for the last two years as the combination of economic restructuring post financial crisis, strong earnings growth, depressed valuations, and high dividend yields offers an attractive proposition."
Mohammed Yasin, head of National Bank of Abu Dhabi's brokerage unit, said: "In the short term, for today and tomorrow, we expect to see more volatility in the markets and will not be surprised if the market closes down one of these days. You definitely won't get institutional investors jumping in to buy into these markets until the indices are included in the benchmark.
"We are seeing on the one hand some new orders coming in. but there are also some investors trying to book profits."
Blue chips that might be bought by MSCI-based funds are likely to outperform today. In a previous analysis, HSBC said individual UAE stocks that might be included in MSCI indexes were Abu Dhabi Commercial Bank; DP World; Dubai Financial Market; Emaar Properties; First Gulf Bank; and National Bank of Abu Dhabi.
In Qatar, MSCI might include Masraf Al Rayan Commercial Bank; Qatar Electricity & Water; Qatar Industries; Qatar National Bank; Ooredoo (Qatar Telecom); and Qatar Islamic Bank, HSBC said.
Morocco's stock market looks set to fall after MSCI dowgraded it to frontier status, saying it had failed to meet liquidity requirements for several years and the downtrend had shown no sign of reversal.
The Moroccan market had already been falling in anticipation of a downgrade, but Moroccan authorities had been lobbying MSCI to remain an emerging market so the decision will still disappoint investors.
MSCI also said it was monitoring Egypt's market with particular concern over the recent shortage of foreign currency on the domestic foreign exchange market.
"MSCI may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation on the Egyptian foreign exchange market to worsen and result in the inability of international investors to repatriate their funds," it said.