Dubai: Market upgrade in May 2014

The recent promotion of the UAE to “emerging market” status could well boost capital inflows to Dubai, although the full effect of the change is likely to take some time to become apparent.

On June 11 New York-based MSCI announced it was re-classifiying its assessment of the UAE’s indices from frontier to emerging market standing. The upgrade, which will take effect as of May 2014, reflects the growing regulatory depth of the Dubai and Abu Dhabi markets, and their compliance with the highest international standards, MSCI said.

“A proper false trade mechanism was introduced in May 2013 on both exchanges,” MSCI added in a statement. “A regulation governing stock borrowing and lending agreements has also been issued and the implementation is expected to be effective in the coming months. The majority of market participants have expressed no major concerns over the safekeeping of investors’ assets and are starting to move away from the dual account structure.”

The upgrade has been a long time coming, with Dubai and Abu Dhabi first seeking inclusion on the emerging markets index in 2008.

Essa Kazim, chairman and CEO of Bourse Dubai and the Dubai Financial Market (DFM), told OBG the upgrade would mean more interest from new types of investors.

“Due to the fact that we were not previously a part of the emerging market index, the type of investment DFM companies would receive in the past were mainly hedge funds,” he said. “However, we are now hoping for more long-term institutional investors, which will give a new dimension to foreign capital inflows.”

Though it is difficult to quantify the impact of the upgrade, Kazim said it would be significant.

“As for the magnitude of investments that the MSCI upgrade will trigger, they could be as low as $400m or as high as $2bn,” he said.

Analysts responded positively to the change. In an interview with Gulf Business News, Max Knudsen, chief market strategist at Abu Dhabi-based ADS Securities, said the change in status would be “extremely significant”. He added, “This would provide a natural boost to all financial sectors, and would have a knock-on effect attracting investment and growth in areas from fixed-income through to equities.”

While the upgrade by MSCI was recognition of the reforms that have been made to improve the operational efficiency and infrastructure of the secondary markets, more needs to be done to ensure overseas investors buy into the markets in Dubai, as well as Abu Dhabi and Qatar, cautioned Georges Al Hedery, head of global markets for MENA at HSBC.

“Some of the other developments that foreign investors would be keen to see in the future are a further relaxation of foreign ownership limits, an increase in liquidity and investable stocks in the market and a broader representation of the various sectors among the listed stocks,” he told Gulf News on June 12.

In the wake of the MSCI upgrade, the DFM announced it would be carrying out further reforms to enhance its appeal to foreign investors, including implementing securities borrowing and lending once the required regulatory process was completed.

“This will further increase the UAE’s attractiveness for foreign investments, thereby placing our market in the position among international markets,” Kazim told Gulf News.

A week after the announcement of Dubai’s elevation, financial services firm Credit Suisse sounded a note of caution, though one reflecting only some short-term issues, rather than of any significant structural concerns. In a statement released on June 18, the bank said it was maintaining its neutral position on the UAE markets, warning that the surge on the exchanges – and in particular the Dubai bourse, which has climbed some 45% since the beginning of the year – could rebound, with Western institutions being likely to use prevailing strength as an opportunity to take profits.

“As a result, we see the current momentum and rich valuation premium as being unsustainable. We therefore advise investors to wait for the market to consolidate before re-entering the UAE,” the bank’s report said.

However, Credit Suisse pointed out that the long-run effect of emerging market status will be positive – and potentially large. The presence of more institutional investors will likely encourage greater local participation, and as liquidity levels rise, additional firms will list. This in turn could have the benefit of creating a positive cycle, leading to higher valuations and more trading activity.

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