Local fund managers have been clamouring for years for an upgrade of regional bourses to emerging market status, rather than the current more remote “frontier” classification.
FTSE, a sister company of the Financial Times, has approved the United Arab Emirate’s markets for inclusion in its benchmarks. This means that, in September, about 170 funds tracking the FTSE index of emerging markets will seek exposure to the Abu Dhabi Exchange, Dubai Financial Market and Nasdaq Dubai.
“The UAE market had made sufficient improvement over a short period of time to go straight to an emerging market,” says Jonathan Cooper, FTSE’s regional managing director. He cites established regulators and a competitive brokerage landscape as reasons for inclusion as emerging rather than frontier status.
But MSCI Barra, usually considered a more influential index that is used by about 80 per cent by value of emerging market tracker funds, has proved a tougher nut to crack. It is due next month to revisit its decision last year not to give the UAE “emerging” status.
Haissam Arabi, chief executive of Gulfmena, an alternative asset manager based in the Dubai International Financial Centre, says that if the UAE were promoted up to $5bn could flow into its stock exchanges. Initial public offerings, which have been off the agenda since the financial crisis but now beginning to creep back, could also expect an easier run.
As things stand, the UAE’s markets trail Saudi Arabia, Kuwait and Qatar in terms of market capitalisation, but they are more liquid, easier for foreigners to access and have a competitive brokerage network.
MSCI Barra, which has declined to comment on the classification process, last year identified several barriers that prevented the from UAE stepping up.
Among the reasons were a delay between payment for a stock and receipt of the underlying share, and a lack of distinction between proprietary and client trading accounts.
There are also concerns that limits on foreign ownership on some UAE stocks – varying between 15 and 49 per cent – alongside government stakes in many of the country’s blue chip companies limit the free float available to foreign institutions.
On the positive side, Nasdaq Dubai, a sophisticated but inactive exchange that has been taken over by DFM, allows short selling and derivative products.
Consolidation of local exchanges may also assist an upgrade. Dubai hopes that the DFM’s appeal to retail investors will rub off on Nasdaq Dubai once trading platforms are merged.
The bigger prize, however, is pan-UAE consolidation.
Officials at the Abu Dhabi and Dubai bourses have confirmed that their respective governments are discussing a tie-up, though a speedy resolution is unlikely given the obstacles and sensitivities involved.
A merger would make the UAE the second-largest – and most open – exchange in the Gulf after Saudi Arabia’s Tadawul.
It would also increase the pool of stocks on one bourse with a free float needed to lure foreign investors.
As Mohammed Yasin, chief executive of Shuaa Securities, says: “ADX and DFM combined have a better chance of gaining access than each alone.”