Abu Dhabi targets exchange growth

A multi-pronged bid to bring a new wave of investors to the Abu Dhabi Securities Exchange (ADX) and increase liquidity is building momentum, led by plans to diversify the instruments on offer.

The introduction of derivatives, in particular, is expected to boost trading, while a separate drive to broaden the range of sectors represented will support efforts to increase listings on both the main board and the secondary exchange.

While the new measures are expected to bring fresh impetus to the ADX, the current economic environment looks likely to slow the rate of market expansion.

Broader base

The exchange has enjoyed a higher profile since being awarded a place on the MCSI’s influential emerging markets index last year. Over 1600 institutional investors opened new accounts in the months following the upgrade, with a further 560 registering in the first three quarters of 2015, according to local media reports.

While institutional investors represent a minority of the 960,000 investors currently registered on the ADX, they account for around 35-40% of daily trading volume, with this level set to rise as the exchange’s offer expands.

Interest has also been generated by the Second Market, launched in November 2014 for trading shares of private joint-stock companies. The measure is seen as an avenue for medium-sized firms, especially family-owned businesses, to progress onto the main trading boards after a period of capitalisation and growth.

While there are currently just two firms listed on the Second Market – investment management company The National Investor and developer Manazel Real Estate – a third could join before the end of the year, according to Rashed Al Balooshi, CEO of the ADX.

The ADX is also working to broaden its base by encouraging companies operating in underrepresented sectors to go public. To date, the main index remains dominated by firms in the banking, insurance and real estate sectors, although Al Balooshi told OBG that education, health care, retail and petrochemicals are the areas with the greatest potential.

Boosting liquidity

While the capital market’s medium-term prospects are bright, the ADX still faces constraints to growth, led by a shortage of liquidity.

Jassim Alseddiqi, CEO of investment firm Abu Dhabi Financial Group, told OBG that regulatory changes paving the way for the launch of new financial instruments would help drive the market forward in the long term, while the introduction of market makers and the MSCI upgrade were also important factors.

“New initial public offerings (IPOs) will go a long way in this regard, although it is still a tough time to list,” he acknowledged. “That being said, when things settle, we expect to see more IPOs.”

Indeed, the pace of IPOs across the GCC slowed in 2015, despite a slight uptick in the second quarter, according to a report by PwC released in early November. There were no IPOs in the third quarter, according to the firm, which attributed the inactivity to a combination of Ramadan and the more challenging economic and geopolitical backdrop. In particular, the report cited the volatility of oil prices, conflict in Syria and Yemen, and the slowing of the Chinese economy as top contributors to the decline in activity.

Ryan Lemand, the head of managed solutions and business development at Abu Dhabi-based ADS Securities, also noted the current slowdown in IPOs was in part due to weak momentum in financial markets around the world.

“Local markets are driven by momentum,” Lemand told OBG. “Triggers are generally geopolitical in nature or stem from new IPOs or big surprises in terms of earnings or very large products. However, momentum drivers are weak right now.” Given the current climate, Lemand believes IPO activity is likely to build in the second quarter of 2016.

Tighter liquidity conditions in Abu Dhabi’s capital market tracks developments in the broader UAE financial sector. Data issued by the Central Bank of the UAE showed a decline in bank lending nationally, with industry-wide lending growth easing to 7% year-on-year in September, marking the slowest rate in more than 18 months.

Al Balooshi told OBG that the launch of derivatives, which is expected to take place in 2016 or soon thereafter, would play a key role in increasing liquidity.

“For the exchange to mature, we must offer derivatives to improve the variety of products being offered and help Abu Dhabi integrate more closely into the wider international marketplace,” he said.

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