Low Risk, High MCAP

Economic News

22 Jul 2010
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With one of the world’s most prestigious financial newspapers awarding the UAE and Qatar a joint silver medal for safety in investment mid-month, the Emirates have been basking in some positive press in recent days. There was more Olympic-style success to come though as the month closed, with the UAE winning gold for market capitalisation growth amongst the Gulf Cooperation Council (GCC) states.

First, the investment report from the UK-based paper, the Financial Times (FT). On August 17, news site menareport.com covered an FT survey of Arab states that assessed them according to the degree of safety any investment made within them could expect.

The survey awarded first place to Kuwait, with the UAE and Qatar joint second. Iraq’s southern neighbour was given a “very high” mark for investment and a “low risk” rating, alongside a strong debt repayment ability. The UAE and Qatar got a “high” investment rating and a “low risk” classification, coupled with a strong credit rating in the balance. Thus these three emerged as the best and safest places for investment in the Arab world last year, a clear reflection of their strong financial and economic situation, as well as their political stability.

Good news for potential and actual investors -- and perhaps another factor explaining the further news this month that the UAE’s stock markets are amongst the most rapidly expanding in the world.
A special report compiled by the National Bank of Abu Dhabi’s capital markets division released at the end of August showed the UAE recording the highest growth in market capitalisation (MCAP) in the GCC during the first half of 2004.

Over the period, MCAP in the UAE had jumped from $44.65bn at the start of the year to $60.03bn, a growth of 34.45%.

It also showed the Emirates having the second highest overall MCAP in the Arab world, though some way behind leading country Lebanon.
The report also demonstrated that amongst all Arab markets, the UAE stock markets had had highest number of new listings during the first half of this year.

However, the statistics, as ever, require a few qualifying remarks. These were provided for the Gulf News in its August 31 edition by an un-named senior stock analyst at Abu Dhabi Financial Services, the capital markets arm of the National Bank of Abu Dhabi (NBAD).

“Although the growth of the MCAP of the UAE stock markets is the highest in the GCC,” he pointed out, “in terms of actual MCAP, the UAE is third after Saudi Arabia and Kuwait, while overall the growth in MCAP in the GCC is impressive.”

Many analysts put the nonetheless-healthy growth rates down to a number of key factors, with few placing the increased numbers of market participants amongst these.

“The growth was not because of new companies entering the market,” the Abu Dhabi Financial Services analyst said. Some five new companies were listed during the first half of 2004.

Instead, high liquidity in the market and the increasing appeal of stock markets in general as investment options have been widely advanced as key growth determinants. Alongside these, healthy historical returns and a strong economy – boosted by oil price surges in particular -- have also contributed to the growth in the MCAP of the GCC states.

Meanwhile, others pointed out that while the growth was impressive, the low value of shares traded on the UAE markets overall indicated that most of the trading was being done by long-term investors, such as government, semi-official and big corporate bodies.

The total value of shares traded in the Emirates during the first half of 2004 came to Dh19.49bn, the third highest among GCC markets, but accounting for only 2.10% of the GCC total.

There are also still relatively few companies trading on the UAE’s two exchanges – the Abu Dhabi Securities Market and the Dubai Financial Market. Amongst these, the figures showed that two foreign entities had accounted for much of the MCAP. Qatar Telecom and Sudan Telecom saw their net profits up by 29% and 160% respectively during the period in question.

Yet the figures also tell a story of important potential. With the UAE seen increasingly as a safe option for investors in general – and the financial markets there showing such rapid growth – the basics are in place for further take off. Certainly, the report’s claims that next year will see the UAE’s markets taking over the Arab financial world may be exaggerated; but with the high growth in net profits that has been recorded in the second quarter financials of the banking, telecom, insurance and hotel industries, positive trends are likely to continue in the second half of this year, further consolidating the MCAP figure. To return to Olympic analogies, the Emirates’ markets are undoubtedly on their way to becoming future champions.

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