MSCI said it would wait until December to decide if the countries’ stock markets met the criteria to be considered “emerging markets,” a rise in status from their current designation as “frontier markets.”
The decision to wait six months and reconsider is unusual, as MSCI announces such changes once a year.
At stake for the Dubai Financial Market, Nasdaq Dubai and Abu Dhabi Securities Exchange, the three stock markets resident in the UAE and Qatar, is a chunk of some $450 billion in global capital invested in emerging markets.
It also enhances their markets’ prestige vaulting them into the ranks of some of the fastest growing economies. By contrast, frontier markets include countries like Bangladesh and Botswana.
MSCI said it needed more time to assess a mechanism introduced by the three exchanges only a month ago called delivery versus payment (DVP) that makes it easier to complete the purchase of securities.
The system hasn’t been in place long enough to fully evaluate it and MSCI said there are problems that need to be addressed.
But MSCI hinted that the UAE, and especially Qatar, faced a more serious obstacle because of the limitations they place on foreign investment in locally traded stocks.
Qatar has a ceiling of 25 percent.
While the UAE has a higher ceiling of 49 percent, many of its most popular stocks are more restricted.
Etisalat, the Middle East’s largest telecommunications operator by market capitalization, is banned to foreigners, while Dubai’s biggest bank Emirates NBD allows foreigners to hold only five percent.
“It is a problem big enough under current conditions for Qatar not to be included,” Remy Briand, global head of index research at MSCI, said.
“The UAE has a higher level and in a zone that gives a little more room. It is our hope that during this extended period it will be increased.”
However, both countries have indicated they have no intention of raising the limits for now. Mohammed Al-Shihhi, the undersecretary at the Economy Ministry, said recently that the UAE did not plan to raise the ownership cap.
Qatar wants individual firms to raise foreign ownership limits but isn’t planning a general increase, an unidentified stock market official said.
Yazan Abdeen, a Dubai-based fund manager for ING Investment Bank, said the failure to raise the cap could jeopardize Qatar’s upgrade next December.
“There is a concentration in Qatar in four or five stocks which are the majority of market cap. This makes the barrier higher for emerging status. The largest is Industries Qatar, but it’s closed due to foreign ownership limitations,” Abdeen said.
“They regard these assets as strategic.”
Last year, MSCI weighed promoting the two Gulf countries, but decided to wait until the settlement system was upgraded. In the meantime FTSE Group, another market benchmark organization, offered some hope when it decided in September to categorize the UAE as a “secondary emerging” market.
As a result, investors had been trading up share prices in the three stock markets over the past month in anticipation that the MSCI announcement would bring foreign investors into the market and increase demand.
The markets, however, mostly took the news in stride.
While Dubai’s DFM General Share index fell the most in a month, Qatar’s QE Index and Abu Dhabi ADX index closed almost unchanged on Wednesday.
“We don’t think the decision to delay is going to be unreservedly negative for the market. At least we are happy that the story is behind us and people can focus on underlying fundamentals,” Abdeen said.
Local stock market officials said they looked on the delay – as against an outright “no” — as a positive sign and said they are intent on using the grace period to make themselves MSCI-friendly.
“Nasdaq Dubai will work with market participants in coming months to increase their understanding of the enhancements to the clearing and settlement process,” its president, Jeff Singer, said on Wednesday.
The UAE and Qatar have worked hard to establish themselves as financial centers as part of a wider strategy of creating whole new industries in tourism, aviation, media and technology. Vast amounts of oil-generated wealth ensure a ready clientele.
The Qatar Financial Center was set up by the government in 2005 and it is working to develop its asset-management industry.
In the UAE, the Dubai International Financial Center (DIFC) operates as a financial free zone while in Abu Dhabi, Securities Exchange is building a headquarters with more than 21,000 square meters of office space and a trading floor of 1,000 square meters.
More recently, their efforts have been helped by the Arab Spring, which sparked mass protests and a crackdown in Bahrain, which had pioneered the strategy of luring banks and investors to the Gulf.
But the UAE and Qatar rely on local investors as customers.
A recent research note from Al Ramz Securities showed that only 3.3 percent of UAE stocks are held by foreign investors.
Besides regulatory issues, the Gulf suffers a glut of stock markets (bourses).
The UAE and Qatar have a combined population of just five million people, yet they serve as home for three stock exchanges.
