Declining oil prices and regional unrest made 2015 a challenging one for capital markets across the region, and Abu Dhabi equity and debt arenas were no exception. Yet the development of new regulations, processes and products on the emirate’s exchange, and the opening of a new financial free zone on the capital’s Al Maryah Island, mean that capital market activity in Abu Dhabi is poised for a new phase of growth when investor sentiment again turns positive.
One of the most striking features of the Abu Dhabi Securities Exchange (ADX) is the speed with which it has developed from a fledging investment platform to an institution of global significance. Prior to the turn of the century, stock trading in the emirate was carried out on an informal basis, and it was not until the creation of the Abu Dhabi Securities Market (ADSM) in 2000 that officially sanctioned market activity emerged. For the first time, investors could direct their capital into a regulated exchange, where the early listings of blue-chip domestic brands such as National Bank of Abu Dhabi (NBAD) were driving the first phase of the market’s expansion. By the mid-2000s, the ADSM had attracted its first foreign listings, and in 2008 a new era of development was ushered in which saw the rebranding of the institution as ADX, and a renewed effort on the part of the authorities to deepen the market through the addition of yet more foreign listings, regulatory reform and new products. This has been a continuous process, with recent years seeing product innovations such as exchange traded funds (ETFs), procedural enhancements such as the introduction of eXtensible Business Reporting Language (a protocol which introduces a common standard of financial reporting across ADX’s listed companies); and technological advances such as the introduction of the X-Stream trading platform provided by NASDAQ OMX, which brings ADX into line with some of the world’s largest exchanges and provides it with a cutting edge, internationally compliant, multi-asset framework on which to base future expansion. Much of this development was undertaken with a view to establishing ADX as a regional investment platform capable of tapping into global capital flows. In 2015, in a move to provide the most up-to-date electronic services and smart applications to its investors and stakeholders, ADX released the revised version of its mobile application, which provides investors with enhanced services and the opportunity to utilise the latest technologies ADX offers with real-time quotes, news and announcements and tools that keep investors up-to-date with market activities. ADX has also launched the Sahmi (“My Shares”) smart kiosk. Sahmi offers an array of electronic services that include the issuance of a new investor number in 60 seconds with a UAE ID card. The service also allows for modification of existing investors’ details and obtaining financial reports and investment statements. ADX became the first exchange in MENA to offer this service.
The international recognition bestowed on the exchange in 2014 represented a significant milestone. In May 2014, ADX was added to Morgan Stanley Capital International’s (MSCI) influential emerging market index, and in September 2014 S&P Dow Jones launched a similar re-classification. The elevation of ADX from “frontier” to “emerging market” status offers the prospect of greater international investment flows: passively managed global investment is automatically directed to ADX stocks included in the EM indices, while ADX as a whole stands to benefit from what is frequently termed as the “radar screen effect”, by which more visible stocks attract more distant investors. Research has also shown that the beta value, or volatility, of domestic exchanges tends to decrease when they are promoted to an influential index such as the MSCI. ADX was already classified as an emerging market by FTSE in 2009 and by S&P and Russell Investment in 2011.
The rapid development of ADX has taken place in the context of a highly competitive national environment. Despite its relatively small population of 9.1m in 2014, the UAE is home to three bourses, which compete for the interest of local, regional and international investors. Overall interest in regional markets is already on the rise, which is also benefitting the UAE. “We see the opening of exchanges such as the Saudi Stock Exchange as a positive. It will encourage more liquidity to the region, more diversification and more institutional investors. This is a step in the right direction, as the ADX is currently dominated by retail investors and more diversification would be highly welcomed,” Abdellah Sbai, managing director and head of capital markets at Waha Capital, told OBG.
ADX, which is owned by the government of Abu Dhabi, and the Dubai Financial Market (DFM), a public joint-stock company, are both regulated by the Abu Dhabi-headquartered Securities and Commodities Authority (SCA), while the Nasdaq Dubai – formerly known as the Dubai International Financial Exchange – is a privately held institution that has been in operation since 2005, and is overseen by the Dubai Financial Services Authority. ADX’s total market capitalisation stood at Dh447bn ($121.7bn) at the end of 2015, compared to the Dh322.6bn ($87.8bn) of the DFM and the Nasdaq Dubai’s Dh96.9bn ($26.4bn), making it the largest exchange of the three.
Abu Dhabi’s exchange is a broadly based market, and its listings are a reflection of the government’s success in diversifying the economy away from its hydrocarbons-based core; this is consistent with the diversification process outlined in the Abu Dhabi Economic Vision 2030 strategy document. The main board of the market is divided into nine subsectors: banking, investments and financial services, real estate, energy, consumer staples, industry, insurance, telecommunications and services. At the end of 2015 a total of 66 public companies were listed on the exchange, with insurance, banking and industry making up the largest subsectors in terms of listings. The prominence of these economic fields is based upon Abu Dhabi’s emergence as a financial centre, with domestic giants such as NBAD, Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank and Union National Bank all present on the board. The industrial category is dominated by the cement companies that have thrived on the expansion of the UAE’s real estate and infrastructure sectors. The energy sector remains under-represented on the exchange, with just two listings; this is because the majority of the hydrocarbons activity for which Abu Dhabi is renowned are controlled by the government.
One of the key developments of the exchange in recent years was the establishment of a second market for private joint-stock companies (PJSCs). Still in the early growth stage, the PJSC board gained its first two listings at the close of 2014: these were The National Investor (TNI), one of Abu Dhabi’s best known investment firms, and the leading real estate player Manazel (see analysis).
The new market implements rules that are similar to those for the main board regarding trading, clearance, settlement and the transfer of shares, but there are some differences in criteria, designed to make the process a more enticing one for PJSCs – such as the eradication of the minimum capital requirement imposed on the main board’s public companies and less onerous reporting requirements. The establishment of the PJSC board promises to make it easier for companies that are looking to grow to access funding for future expansion, and has the potential to act as a useful stepping-stone towards a fully public listing.
ADX is also home to nine open-ended listed funds, five of which are operated by the emirate’s largest bank, NBAD. Since 2009, NBAD has also run the only ETF listed on the exchange, the NBAD OneShare MSCI UAE, the first to be established in the GCC and an innovation that grants investors low-cost and low-risk access to a broad mix of securities. On the debt side of ADX, one tradeable instrument was listed on the exchange at the close of 2015: an Abu Dhabi government bond listed on the exchange in late 2014 in a bid to boost debt instrument trading volume on the exchange. The NBAD Subordinated Convertible is another tradeable bond, which dates from 2006.
The Debt Market
With just two bonds listed on ADX, the bulk of debt market activity in Abu Dhabi is carried out off the exchange, on an over-the-counter basis. Recognising the usefulness of a vibrant primary and secondary debt market, particularly as an alternative source of funding for developing companies, which presently rely on lending by banks, the government has in the past moved to encourage more debt offerings in Abu Dhabi. The emirate’s most recent sovereign issuance, a five-year $3bn bond in 2009, followed two similar five-year offerings, which together formed the beginnings of a yield curve by which subsequent corporate offerings might be made.
However, corporate offerings remain at a low level and, as there have been no subsequent bond issuances by the Abu Dhabi government, it has fallen to state-owned entities (SOEs) to drive domestic bond growth. According to Abu Dhabi’s Debt Management Office, which has been advising the Executive Council on the emirate’s debt profile since its creation in 2009, around 90% of all debt issued in Abu Dhabi has come from SOE activity. The Tourism Development and Investment Company, Mubadala Development Company, International Petroleum Investment Company and Abu Dhabi National Energy Company (TAQA), in particular, have emerged as regular bond issuers. Recent years have seen further attempts at the federal level to boost corporate issuances: in September 2014 the SCA met with potential bond issuers and financial firms in the UAE to outline new rules designed to make it faster and cheaper to offer and trade in conventional and Islamic bonds.
According to the new regulatory regime, the minimum issue size has been reduced from Dh50m ($13.6m) to Dh10m ($2.7m), and issuers of debt instruments are henceforth only required to publish financial statements annually rather than quarterly. The SCA has also shortened the approval time for the issuance applications to five days.
Going into 2016, two key considerations have emerged with regard to Abu Dhabi’s debt market: first, whether low oil prices and a fiscal deficit will persuade the Abu Dhabi government to offer its first sovereign issuance since 2009, and thereby take another useful step towards establishing a yield curve; and second, what progress will be made in the short term towards a long-anticipated UAE public debt law, which would allow the federal government to issue its first sovereign bonds. The latter development would enable the central bank to issue short-term Treasury bills as a liquidity tool, while longer-term federal bonds might be deployed to finance major government development projects.
As with other exchanges in the region, ADX’s performance over recent years can be characterised as one of recovery in the wake of the global economic crisis, followed by a more recent period of market uncertainty due to external factors such as the fall in the price of oil. The recovery phase began in 2012, when ADX general market index recorded a gain of 10% after a subdued performance in 2010 and 2011. In 2013, the exchange saw its most rapid growth since the pre-2008 era, with the main index rising by 1659 points over the year to close at 4290, an increase of approximately 63%. In 2014 the index continued to rise, reaching its highest point of 5253.41 in May, before closing the year 6% up on 2013, at 4528. Total trading value grew significantly over the year, rising by about 70% to reach Dh85bn ($23.1bn), while trading volume showed a gain of around 13%. ADX’s market capitalisation, meanwhile, expanded from Dh449bn ($122.2bn) in 2013 to reach Dh464bn ($126.3bn) by the close of 2014.
However, a temporary low of 3892 points in the fourth quarter of 2014, largely the result of a precipitous drop in oil prices, heralded a new phase of market uncertainty which persisted throughout 2015. Index movement during 2015, therefore, was broadly horizontal, with the market trading in a range between the high of 4834 set in July 2015 and a low of 4236 seen in November. On the other hand, ADX continued to attract foreign investors with net foreign investment in the exchange increasing in 2015 to reach around DH5.8bn ($1.6bn), compared to Dh3.5bn ($953m) at the end of 2014, an increase of 65%, where the total number of shares bought by non-UAE nationals amounted to approximately 12.1bn shares with a value of Dh28.7bn ($7.8bn).
“The mood in 2015 was one of wait and see. Local markets are momentum driven, and through the year there was a lack of positive or negative drivers. Momentum drivers might be political events, new initial public offerings (IPOs), earnings or new exchange products being announced. In the absence of these, the market was stable but lacked the depth international investors were looking for,” Ryan Lemand, head of managed solutions and business development at ADS Securities, told OBG at the close of 2015. Given the current climate, Lemand believes IPO activity is likely to build in the second quarter of 2016.
Developing The Exchange
External factors such as low oil prices, a slow recovery in the eurozone, fears over China’s economic stability and regional political turbulence play a significant role in exchange performance. However, the domestic authorities have a strong track record of exchange development, which has brought increased participation and global recognition. In the emirate this process is led by ADX, which in 2016 completes its 2012-16 strategy, aimed at introducing the best standards, product diversification and increased institutional participation.
The SCA, as the national body charged with supervising and developing ADX, has also worked with ADX authorities to enhance the regulatory framework that underpins market activity in the UAE. Attaining MSCI emerging market status has informed this process throughout, as has boosting exchange liquidity. A significant advance towards the latter goal was made in April 2014, when NBAD became the first institution to take advantage of new regulations to become a licensed market maker – an institution which is allowed to quote both a buy and sell price for stocks held in its inventory – in the UAE. Abu Dhabi’s largest bank has started by creating a market for the single ETF listed on ADX, the NBAD Oneshare, but the longer term benefit of market-making activity in the UAE is increased trading activity for the mid- and small-cap listed firms which currently suffer from a lack of liquidity and demand from investors. Other recent exchange advances include: the development of electronic services, including a smartphone app available in the Apple and Android app stores; a business continuity initiative by which the NCEMA 7000 standard will be applied to ADX; the implementation of a circuit breaker system, aimed at boosting investor confidence in high volatility scenarios (which is activated by sharp price moves of more than 5% in a single session); the establishment of rules and regulations for the listing and negotiation of rights issues, by which ADX became the first market in the UAE to implement a rights negotiation when Eshraq Properties sought to raise capital in November 2014; and the activation of margin lending regulations, aimed at boosting exchange liquidity.
Together with the market-making rules, the new margin-lending facility has considerable potential in terms of adding significant volume to daily trading, although the introduction of the regulations during a period of market uncertainty means that their efficacy has been difficult to discern in 2015. Looking ahead, some market participants feel that the next stage of exchange development should focus on the issue of derivatives. “In the long run, a liquid futures and options market would help the exchange by allowing investors to hedge portfolio risk more efficiently. One area that could be improved is the free float available for existing listed companies, which would result in greater foreign investor participation,” Waha Capital’s Sbai told OBG.
While the elevation of ADX to emerging market status has recently advanced it within a global context, the exchange has for many years attracted serious interest from foreign investors. “Progress to date in Abu Dhabi’s capital markets has been very good as we have seen tangible steps forward with the introduction of a market maker and the listing of government bonds,” Salem Al Noaimi, CEO and managing director of Waha Capital, told OBG. Foreign institutional investors, in particular, are a sought-after segment in emerging markets, due to the benefits they bring both in terms of increased liquidity and overall market stability.
In ADX’s case, this investor category is increasing as a proportion of the total; the number of foreign, non-UAE, institutional investors registered with ADX grew by 1158 in 2014, and 709 by the end of 2015. These growing numbers are driven by a buoyant UAE economy and the exchange’s progression from a frontier to an emerging market, brings the number of foreign, non-UAE, institutional investors registered with ADX since its inception to more than 4000. Net trading value of foreign non-UAE investors reached Dh7.2bn ($2bn) in 2015 compared with Dh2.1bn ($572m) in 2014, representing an increase of around 243%. The combined number of retail and institutional investors registered to trade since the establishment of ADX, and up to end of 2015, stands at around 958,699, and the 8192 investor numbers that were granted in 2015 reflect the exchange’s appeal beyond the UAE’s borders. UAE nationals accounted for 3309, while GCC nationals accounted for 344; other Arab nationals for 2309, and 2230 numbers were issued for other nationalities. Serving both nationals and foreign investors is a sizeable financial investment sector, regulated by the Central Bank of the United Arab Emirates (CBU). At the close of 2014, 16 investment companies were licensed to operate from Abu Dhabi, including TNI, ADS Securities, Invest AD and Al Ramz Capital. Between them they offer a full range of asset management and merchant banking services to both individual and institutional investors, operating a wide array of funds focused on the MENA equity markets, but also including a growing number of real estate and private equity funds. A move into the private equity space by some of Abu Dhabi’s most prominent investment firms is one of the more salient industry trends of recent years: Waha Capital, for example, has established a diverse portfolio of equity stakes which includes AerCap Holdings, a New York Stock Exchange-listed global aircraft leasing company; Dunia Finance, a fast-growing consumer finance business; and Dubai-based Stanford Marine Group, a leading operator of offshore supply vessels for the oil and gas sector. Waha Capital has reported a net profit of Dh588m ($160.1m) for 2015, driven by the performance of key portfolio investments and the Capital Markets division. This was 18% higher than an adjusted net profit of Dh498.1m ($135.6m) achieved in 2014, after removing net non-recurring items.
The company has announced plans for new direct investments in energy, infrastructure, health care and education. “Our strong balance sheet will allow us to invest significant capital through our Principal Investments division, which has a MENA focus. Our target sectors are energy, infrastructure, health care and education.” Al Noaimi told OBG. “Waha Capital is also extending our expertise to third-party investors through an investment management offering. We are investing in our own capital markets and private equity funds because we believe strongly in the opportunities and want to closely align our interests with our investment partners”, he added.
In 2015, the SCA completed a round of fund licensing, part of a newly introduced regulatory framework relating to both local investment funds and the marketing and licensing of foreign funds in the UAE. Included in the new measures are requirements that companies establishing local funds must invest at least 3% of the fund’s capital themselves; appoint an investment manager, administrative services company and a custodian; and adhere to stringent reporting requirements. Foreign funds must be approved by a supervisory body similar to the SCA and licensed to promote a public offering. The new regulations, which replace a framework operated by the CBU, have resulted in an uptick in fund-related activity; according to the SCA, local mutual funds had approximately Dh5.4bn ($1.5bn) in assets under management as of the end of 2014, which is more than double the amount at the end of 2009.
While ADX remains Abu Dhabi’s flagship capital market institution, the development of a new financial centre promises to significantly add to Abu Dhabi’s inward and outward investment activity. Al Maryah Island has been chosen as the location for a new financial free zone in the emirate, centred on private banking, wealth management and asset management. Known as the Abu Dhabi Global Market (ADGM), it has its own regulatory structure and an independent companies registrar, as well as an independent legal system headed by David Hope, a former English supreme court judge appointed in 2015. The selection of Hope follows the appointment of Richard Teng, previously the chief regulatory officer of the Singapore Exchange, to the post of chief executive of the financial service regulator earlier in the year. With the first non-financial services licensing successfully completed by the end of 2015, and the first financial services companies receiving licenses in early 2016, the ADGM promises to be one of the most significant developments in the UAE financial sector.
Key players are observing the progress. “There continues to be a liquidity issue within the UAE’s capital markets. It requires small advances that will collectively result in positive change. We are on the right track, but must continue to push forward,” Jassim Alseddiqi, CEO of Abu Dhabi Financial Group (ADFG), told OBG. ADFG is itself a major investment firm headquartered in Abu Dhabi, which invests across a variety of sectors and geographies. ADFG’s operations encompass alternative investments, asset management, advisory and research, financing and structuring solutions, securities trading and real estate development.
ADFG won UAE Asset Manager of the Year at the 2016 MENA Fund Manager Performance Awards. Based on its strong performance and international expansion, ADFG’s assets under management have increased significantly to $3.5bn. To date they have been able to achieve an internal rate of return of 26% over a five-year period. ADFG have focused on a few geographic locations – UAE, GCC, prime Central London and Eastern Europe – and their 2016 strategy is focused on growth and acquisitions, based on the assessment that buying opportunities will be at their peak in 2016. Alseddiqi is predicting a buyers’ market where acquisitions, mergers, lending and valuations will all make appealing purchases in the coming year.
ADFG is also investing in luxury property developments in London worth £2bn. The group has sold more than a third of the units at its 1 Palace Street development, overlooking Buckingham Palace, which is due for completion in early 2018. It is also backing construction at New Scotland Yard, with expected completion in 2021. ADFG is also spending €500m on investments in Eastern Europe in the next four years, including major projects in Bulgaria and Montenegro.
The performance of ADX index is likely to remain muted until oil prices strengthen, and the longer-term prospects for market growth are underwritten by Abu Dhabi’s resilient domestic economy: with ample external assets to ride out external shocks, one of the most business-friendly environments in the region, an ambitious government programme of infrastructure development and an expected UAE real GDP growth of 3.1% in 2016, the outlook for ADX remains a positive one. “I think the current sentiment is more negative than the reality,” Mohamed Ali Yasin, managing director of NBAD Securities, told OBG. “The budget for 2016 is necessarily one of consolidation, but people are prepared. The essential projects which are currently under way will continue.” Whatever the direction the index takes over 2016, institutional developments will continue.
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