Investors are stalling on the UAE and Qatar until MSCI reaches a decision on reclassification, according to industry sources.

In mid-June, the global index provider was expected to either promote the two countries to emerging market status or reject the bids entirely. However, in an unprecedented move, the decision was delayed for six months to allow more time for market upgrades, such as delivery versus payment (DVP) systems and foreign ownership limits, to be fully implemented.

Traditionally conservative investors, such as pension funds, are particularly bearish on the markets. Swedish pension fund Länsförsäkringar told Mena FM that it would only include the UAE and Qatar in its global emerging markets mandate if the countries were upgraded to emerging markets status.

"We would not invest in the UAE and Qatar as a separate mandate,” said Christina Berg, senior manager and research analyst at Länsförsäkringar. “However, if they be-came part of the MSCI EM index then of course we would invest in them.”

The €13bn ($18.5bn) pension fund currently has 3% invested in a global emerging markets mandate in equities, managed by one passive manager. Mena FM can also reveal that the fund is now searching for two or three new active managers to replace the present manager, which cannot be named. “We are making this change because we believe that investments into the emerging markets provide some of the best opportunities to make alpha,” said Berg. The fund has previously invested up to 5% of its portfolio in the emerging markets.

The CAN3.2bn ($3.3bn) Montreal Transit Corporation is also likely to increase its emerging markets allocation, but told Mena FM that the UAE and Qatar would not be included in this mandate. “We would not invest directly in the UAE or Qatar,” said Claude Caty, CIO at the Montreal Transit Corporation. “We would, however, be interested in the new MSCI benchmark’s inclusion of these countries.” The corporation currently allocates 2% towards a global emerging marketsmandate, but this is likely to rise by 1.5% in September.

MSCI will return to its decision in December, with many local fund managers expressing optimism that an upgrade to emerging market status will happen for the UAE and possibly Qatar.