MSCI said on Thursday it would continue to “review” the countries’ three stock markets for a promotion from frontier to emerging market status and revisit the matter again next June. But the decision was a disappointment at least in the UAE, where many had expected to finally win the coveted designation after MSCI last June gave the two countries an extra six months to make the necessary changes.
Dubai’s benchmark DFM General Index and Abu Dhabi’s ADX General Index, which had both been given a lift in anticipation of the MSCI decision, fell about 1.25 percent on Thursday. The Qatar Exchange Index held its decline to just 0.2 percent, reflecting lower expectations among investors there that MSCI would grant it emerging market status.
“Many people [in the UAE] were disappointed and surprised by the MSCI decision, based on comments they made in June … In Qatar, it was less of a surprise,” Paul Cooper, the Dubai-based managing director at Sarasin-Alpen & Partners, said.
The Qatar Exchange, Dubai Financial Market (DFM), and Abu Dhabi Securities Exchange, the two countries’ three stock exchanges, have been hoping an upgrade would bring in badly needed capital from global investors and raise their profiles as they seek to become regional financial centers.
But they have little chance of attracting it until they get emerging market status bestowed on them by MSCI. Emerging market countries are expected to pace global economic growth as Europe and the US struggle. A poll of global fund managers by the Association of Investment Companies released on Wednesday found that 27 percent predicted they will “perform well” next year, more than any other group of markets.
By contrast, their frontier market-status relegates the UAE and Qatar to the ranks of countries like Bangladesh and Botswana.
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. Despite that, the markets have been in a funk since the global financial crisis washed in three years ago and put an end to the real estate-fuel boom in Dubai, the UAE’s leading economy. Qatar is prospering on the back of vast natural gas exports, but its securities market has not shared in the boom.
Turnover on the DFM is about a tenth of what it was 2008, while the index is down close to 80 percent from the peak it reached that year. Qatar’s index is up this year, but trading rarely exceeds 10 million shares a day, making it difficult for large institutional investors of the kind the exchange wants to attract to move into and out of stocks. Volume is about 40% less than it was two years ago.
“If you join the index you join the emerging market benchmarks. If not, fund managers have to make an active decision to buy in. So, [the emerging market designation] increases the liquidity of the market,” Sarasin-Alpen’s Cooper said.
“You need the market to be liquid for companies to be traded on a regular basis and that only happens when international investors get involved.”
MSCI said it needed more time to assess a mechanism introduced by the three exchanges earlier this year 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.
“The feedback we received from investors on the introduction of the new DVP model was very positive. The system works well and without major issues. However, we still have concerns highlighted by investors that their assets may not be fully safeguarded,” Remy Briand, global head of index research at MSCI, said on Thursday.
He pointed to the risk of failed trades where a forced sale of assets, without the owner’s consent, remains a possibility. Planned regulations that will introduce securities borrowing and lending and short selling present a way of solving the problem, he added.
But, the Swiss company warned, that regulations have to be in place long enough for investors to judge their effectiveness before the next announcement on market reclassifications in June 2012.
MSCI signaled that Qatar faces a more serious obstacle to getting emerging market status because of its “stringent” limitations on foreign holdings in locally traded stocks and warned that an upgrade was conditional on raising the ceiling.
Although the UAE is not under any pressure from MSCI to raise the ceiling on foreign holding, the Economy Ministry said earlier this month that a proposed change in the Companies Law would make it easier for foreigners to hold more than the current ceiling of 49 percent by authorizing the cabinet to exempt companies and industries.
But Qatar, which enforces a tougher 25 percent ceiling on foreigners, is not planning any change soon, Qatar Exchange Chairman Hussein Al-Abdullah said earlier this month.
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.
The Qatar Financial Centre 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 Centre (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.
But the UAE and Qatar rely on local investors as customers. A recent research note from Al Ramz Securities showed that only 4.4 percent of DFM stocks and 2.3 percent of Abu Dhabi stocks are held by foreign investors.
