Abu Dhabi: Market ability

Bucking the trend in most MENA financial markets, the Abu Dhabi Securities Exchange (ADX) has performed well of late, rebounding strongly from the financial crisis and avoiding more recent downturns that some exchanges have experienced.

A relatively young institution, with its predecessor, the Abu Dhabi Securities Market, established in 2000, the ADX added its 65th company – Insurance House – to its boards in June. Just less than half of the traded firms on the bourse are concentrated in the banking, insurance or financial services sectors, befitting Abu Dhabi’s aim of becoming a regional financial hub.

The ADX has been one of the region’s better performers in the first half of 2011, posting more than $2.5bn in gains in June, with market capitalisation rising to highs not seen since the beginning of the year. By comparison, the 14 official stock exchanges in Arab countries, excluding those in Egypt and Sudan, shed a combined $18.7bn for the month, according to data compiled by the Arab Monetary Fund.

While Dubai’s markets saw increases of around $600m for June, with capitalisation climbing from $54.1bn as of the end of May to $54.7bn, the ADX’s strong showing saw its net worth grow to $73.1bn from $70.5bn just four weeks before. To some degree at least, the growing capitalisation of the Abu Dhabi market is a reflection of the growing perception of the emirate as a safe investment destination during uncertain times elsewhere. The need for such a safe haven has been particularly acute given the ongoing unrest across much of the MENA region, uncertainty over the global economic recovery, concerns regarding Eurozone debt and the slower-than-expected rebound by the US economy.

Despite that appeal, growing foreign and institutional interest may be hindered somewhat by the decision in late June by Morgan Stanley Capital International (MSCI), the investment services provider of New York-based investment bank Morgan Stanley, to continue its deliberations as to whether to upgrade the status of the UAE’s exchanges to that of an emerging market for another six months.

Currently, Abu Dhabi and the UAE are categorised as “frontier markets”, a ranking that limits foreign and institutional investment, as many investors use the MSCI rankings when deciding where to place their money. In the US alone, emerging markets funds have total assets of an estimated $450bn, with much of this going to investment hotspots like Brazil, Russia, India and China, all of which have the emerging market ranking from MSCI.

Steps have been taken to address this, however. The ADX and the two Dubai-based exchanges have put in place delivery-versus-payment (DvP) systems to meet the MSCI qualifications for emerging market status. The DvP is a new programme for completing stock transactions, but the full impact of the system has not been fully assessed, having only come into operation in the second quarter.

MSCI plans to review the status of the ADX and the other UAE exchanges in December 2011, in order to give the DvP share settlement system time to take effect, said Remy Briand, the global head of index research at MSCI, on June 21.

“The new system has been implemented; however, the MSCI criteria include a period of market participant assessment and feedback,” said Briand, when announcing the decision. “That is really why we have this extension of the review: in order for various institutional investors to actually experience their trades and settlement through the new system over a period of time. We will review and get feedback over the next few months.”

According to Haissam Arabi, the chief executive and fund manager at Gulfmena Alternative Investments, the upgrade in status will make a big difference to the ADX and the two Dubai exchanges.

“It would be a massive step forward in the economic life of the country in terms of capital development and attracting foreign direct investment,” he said days before the MSCI decision was announced. “We are not talking about a short-term solution; the MSCI emerging markets index is tracked by investors who are managing funds worth trillions of dollars.”

In announcing the delay of its decision, the MSCI also raised concerns about the limitations on foreign investment in locally traded shares. UAE exchanges currently restrict overseas buyers to a maximum of 49% ownership, though in individual cases this can be lower.

ADX deputy chief executive Rashid Al Baloushi acknowledged that more needs to be done to encourage local firms to open up their shares to overseas investors, however, he explained that there had been a surge in foreign individuals and institutions registering with the exchange.

“We have seen a total of 201 foreign investors, who have opened accounts with us, in the period beginning from January to the last week of June,” he said on June 21. Some 145 foreign institutional investors had signed up since the beginning of 2011. Though the ADX is still currently rated as a frontier market, with many of the MSCI’s key requirements already fulfilled, the prospects for being upgraded are strong.

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