Last week’s upgrade of the Qatari and UAE stock markets to emerging market status by MSCI, the index provider, was a long time coming but is highly welcome nonetheless.
The time taken to attain EM status reflects the rigour of the MSCI process and the importance which investors attach to the classification. It has been a long road for everyone – exchanges, regulators, custodians, brokers and asset managers. But, if it was easy, investors would not value it.
The result is that institutional players are now looking at the Gulf again and in some cases are investing for the first time in five years. As a result of the upgrade, we expect that $430m will flow into Qatar and $370m into the UAE markets from passive index investors over the course of the next year.
Amid the celebrations, however, perhaps a word of caution is in order. The upgrade does not mean that everyone can, or should, relax. In the first place, some of our biggest regional markets, Saudi Arabia most obviously, are not in the running for EM status. And, when it comes to Qatar and the UAE, activist emerging fund managers, who can still be overweight or underweight an index, need to be courted and retained.
The $800m is our quantitative team’s estimate of the passive index funds which will be automatically allocated. We estimate that at least five times that figure – an additional $4bn in actively managed funds – could be available for investment in the Qatar and UAE markets alone. More needs to be done to attract and retain these funds.
A large pool of institutional money pulled out of the GCC in the wake of the 2008-2009 crash. Yet institutions, critically, engender more stability in equity markets which are central to the widening and deepening of economies.
In the primary sense, family companies looking to list and private equity operators looking to divest need buoyant, or at least rational, markets in which to sell their shares.
We have observed cases where family businesses in the GCC which may otherwise have taken the plunge of listing have opted not to because local markets have historically been subject to extremes of euphoria or the depths of despair.
The participation of institutions, which are long-term, fundamental investors, is thus a critical piece of equity market development.
How to attract and retain them? In the first place, our markets are narrow. They are dominated by financial and real estate stocks with a smattering of telecoms. It would be great to see some more consumer shares listed, some more telecoms and hospitality and tourism shares on offer – perhaps even an airline.
Secondly, foreign ownership limits which remain in place across the Gulf should be raised – perhaps gradually but raised nonetheless. In Qatar, only 25 per cent of most companies can be owned by foreigners. In the UAE it is 49 per cent.
In Saudi Arabia, the market can be accessed by warrants but many funds are prohibited from investing via warrants.
In the UAE, as things stand, companies looking to conduct an initial public offering must offer more than 50 per cent of the value of the company in new shares. That is high by any standard.
In Kuwait, foreign investors are exposed to a 15 per cent withholding tax on dividends.
When companies do list, investor relations can be rudimentary at best and, with the exception of blue-chips such as Emaar and DP World, are not proactive.
Now, as the markets pick up, is the time for regulators and others to encourage institutional investors.
Sceptical? Consider the fact that sentiment in the GCC markets has taken noticeably longer than elsewhere to return – despite high oil prices, attractive valuations and solid GDP growth numbers.
In 2009 and 2010 other markets around the world started to stabilise and to re-rate. But that did not happen in the Middle East.
Consider also the absence of IPOs.
And then look at the immediate causes: low valuations, limited turnover, high volatility – and an absence of institutional investors.
Mirza Beg is managing director, corporate finance, and Michael Bevan is managing director, equity capital markets, Middle East and Africa, HSBC Bank Middle East
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