Up to 27 stocks from Qatar and the UAE could be included in the MSCI emerging markets index, according to research by Deutsche Bank.

The bank has identified 15 stocks in Qatar and 12 stocks in the UAE that could meet the US index compiler’s criteria, higher than MSCI’s provisional list of a total of 17 stocks. MSCI plans to release the final list in its semi-annual index review on 14 May.

“We expect the inclusion of more stocks to also drive a higher weighting of about 1.3 per cent versus 0.95 per cent [estimated] previously, which in turn should push more liquidity into the two markets when Qatar and the UAE are officially inducted from 2 June,” says Aleksandar Stojanovski, a research analyst at Deutsche Bank. “Market conditions are turning favorable for foreign investors.”

Stock markets are benefiting from increased liquidity, with year-to-date average daily trading at $700m in the UAE – the highest in ten years – and $185m in Qatar, close to its peak in 2008.

That has exacerbated the need for new listings and higher foreign ownership limits, which several companies in the UAE and Qatar are currently planning.

“We’ve seen a lot of rallies in share prices, under the expectation that earnings will continue to grow,” says Fahmi Alghussein, partner at Dubai-based HK Advisory Services. “Going forward, all eyes will be on whether earnings are moving fast enough. From the top down, [the overall economy] looks good, but it now has to come from the bottom up [reflected in company fundamentals].”

Salah Shamma, co-head of equities at Franklin Templeton Investments Middle East, says investors are still optimistic, but are going to be more selective.

“We expect to mainly see interest in market leaders that are poised to benefit from the region’s growth picture over the next three to five years,” he says. “But we’re a bit worried about the mid-tier to smaller companies because there is excessive leverage to speculate and they are easier to manipulate.”

While the strong run-up to the emerging markets status upgrade could be followed by some selling pressure following the event, Shamma does not expect that to cause a major drop in the markets.

“I wouldn’t expect significant sell-offs as there are players waiting on the sidelines to gain exposure to a region pegged to the dollar and with scope for long-term growth,” he says.