The emirate’s capital markets stand at an interesting point in their short history. Having recovered from the effects of the global economic crisis, Abu Dhabi was recently upgraded to emerging market status by two of the world’s most influential indexers, as the exchange prepares for expansion. In the meantime, Abu Dhabi’s first financial free zone is rapidly taking shape on Al Maryah Island. The combined effect of these developments will be a deepening of the emirate’s capital markets – which, if the government’s plans are realised, will establish Abu Dhabi as a centre of global finance.
The formal inclusion of the Abu Dhabi Securities Exchange (ADX) in the Morgan Stanley Capital International’s (MSCI) influential emerging market index and the S&P Dow Jones Indices in May 2014 and September 2014, respectively, capped a period of rapid development for the bourse – an even more impressive feat given its relatively short history. “The MSCI upgrade has been seen as a very positive step forward. Passive funds alone will help to create more liquidity and it will heighten interest among institutional investors. It is these institutional investors and endowment funds that are the key to driving the equity market forward. With greater global attention directed towards Abu Dhabi, there is an opportunity to capitalise, but we must enhance our transparency and enforce stiffer regulations related to disclosure,” Nazem Fawwaz Al Kudsi, former CEO of Invest AD, told OBG.
Although informal trading in company stocks has been carried out in the emirate for decades, officially sanctioned market activity began in 2000 with the establishment of the Abu Dhabi Securities Market (ADSM). The following years saw market participation driven by the listing of domestic giants like the National Bank of Abu Dhabi (NBAD), with the ADSM starting to attract its first foreign listings by the mid-2000s. In 2008 a new era of development was kick-started with the ADSM’s rebranding as ADX, as the authorities turned their focus to broadening the market through more foreign listings as well as new products and processes.
Recent years have seen ADX take significant steps towards enhancing the regulatory and technical frameworks that underpin its daily activity. The new eXtensible Business Reporting Language (XBRL) framework, introduced by the Securities and Commodities Authority (SCA), was implemented starting in 2011 – a protocol that introduces a common standard of financial reporting across the exchange’s listed companies – thus allowing public companies in Abu Dhabi to be easily compared with those listed elsewhere. The year 2014 saw further advances, as ADX went live with a new trading engine in April – the completion of an upgrade that was set in motion in 2012. The introduction of NASDAQ OMX’s X-Stream Trading technology brings ADX in line with some of the world’s largest exchanges and provides it with a cutting-edge, internationally compliant, multi-asset trading platform.
The regulatory and technical development of ADX in recent years has been central to its transition from frontier market to emerging market status on the MSCI and S&P Dow Jones Indices. However, it has also helped the exchange thrive in a highly competitive environment. Despite its relatively small population, estimated at 9.35m in 2013, according to the World Bank, the UAE is home to three stock markets that compete for the interest of local, regional and international investors.
ADX and the Dubai Financial Market (DFM) – the former is currently owned by the government of Abu Dhabi and the latter is a public joint stock company – are regulated by the Abu Dhabi City-headquartered SCA, while the NASDAQ Dubai (formerly 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. As of late January 2015, ADX had a total market capitalisation of $126.1bn, compared to $96.7bn for the DFM and $30.27bn for the NASDAQ Dubai.
While the growth of ADX in recent years demonstrates its utility as a stand-alone exchange, the dispersed nature of the UAE’s capital markets has led to calls for the unification of the nation’s bourses. In late 2013 it was reported in the international press that ADX and DFM had appointed advisors for a potential statebacked merger. Likewise, the question of a merger remained a central talking point within Abu Dhabi’s financial community throughout 2014.
In July 2014 informed sources denied reports that merger plans had been shelved to local press, claiming that talks had reached the technical valuation stage. However, many in the financial community believe the question of valuation represents a potential stumbling block in the negotiation process.
While the outcome of the negotiation process remains unknown, as of 2014 any merging of ADX and DFM would result in a combined market capitalisation in the realm of $214bn, according to December 2014 figures, making the new exchange the second largest in the GCC, behind only the Saudi Tadawul.
While the UAE’s exchanges remain separate entities, ADX has maintained its position as the market that most closely reflects its local economy. The nine sectors in which companies on the exchange are listed – banking, investments and financial services, real estate, energy, consumer staples, industrial, insurance, telecommunications and services – illustrate the success with which the emirate has implemented Abu Dhabi Economic Vision 2030, its long-term economic development programme.
By year-end 2014 there were a total of 67 securities listed on the exchange – comprising 65 firms, 1 convertible bond and 1 exchange-trade fund (ETF) – with insurance, banking and industry making up the three largest sectors by listings. In November 2014 ADX launched a platform for trading shares of private companies, known as the Second Market, and, as of the end of 2014 two companies had listed, Manazel Real Estate and The National Investor. The energy sector remains underrepresented on the exchange, with just two listings – due to the fact that the majority of the hydrocarbons activity, for which Abu Dhabi is renowned, is controlled by the government.
The exchange is also home to nine open-ended local funds, five of which are run by the emirate’s largest bank, NBAD, and a single ETF – the NBAD OneShare MSCI UAE. Launched in 2010, the fund was the first ETF in the emirate. In 2012 the fund recorded another first with its transformation from synthetic replication (whereby the ETF manager enters a swap contract with a third party that agrees to pay a return replicating the movement of the index on which the ETF is based) to physical replication (whereby the ETF manager purchases the underlying assets of the index). The switch to physical replication improves the fund’s scalability and reduces the need for restrictive collateral requirements.
While the equities side of the market continues its steady development, ADX’s debt market remains in its early stages, with just two tradable debt instruments as of November 2014 – the NBAD Subordinated Convertible Notes, which dates from 2006, and an Abu Dhabi government bond recently listed on the exchange worth $1.5bn, with a maturity date in 2019, in a bid to boost volume in the debt market. However, efforts to deepen the debt market are closely linked to the wider issue of national debt issuance, which is largely beyond the control of the authorities of ADX.
The market was also served by 48 licensed brokers as of the end of 2014, including locally based, dedicated firms as well as the brokerage operations of large multinationals (such as HSBC Middle East Securities); regional players (EFG-Hermes Brokerage UAE); UAE-based firms (Emirates NBD); and financial houses or banks originating in Abu Dhabi, such as First Gulf Financial Services and NBAD Securities – the former was sold to Abu Dhabi Financial Group in late 2014.
The vast majority of Abu Dhabi’s debt market activity takes place outside the exchange on an over-the-counter basis. The most recent sovereign issuance by the Abu Dhabi government came in April 2009, with the successful offering of a five-year, $3bn bond. This came on the back of two five-year sovereign issuances, forming the start of a yield curve by which subsequent corporate offerings might be made. However, there has been a lack of a government issuance over the past five years, with state-owned entities (SOEs) instead driving domestic bond growth.
Four SOEs in particular have repeatedly gone to the market, establishing themselves as reliable issuers of debt: the Tourism Development & Investment Company, Mubadala Development Company, International Petroleum Investment Company and Abu Dhabi National Energy Company (TAQA). According to Abu Dhabi’s Debt Management Office (DMO), which has been advising the Abu Dhabi Executive Council on the emirate’s debt profile since its creation in 2009, about 90% of all debt issued in Abu Dhabi has come from SOE activity.
The low level of corporate bond activity in Abu Dhabi and the UAE has been the subject of debate for some time now, and over the last year the authorities have moved to address the issue. In July 2014 ADX entered into an agreement with NBAD whereby the bank will act as a window for investors wishing to trade or hold bonds on the exchange. In September the SCA announced the details of new rules designed to make it easier to list bonds and sukuks (sharia-compliant bonds) on ADX and the DFM. Combined with the first-ever listing of a government bond on ADX in 2014, these efforts by both the national and local authorities represent the most significant attempt to boost the debt market in recent years (see analysis).
Since the onset of the global financial crisis in 2008, exchanges across the region have undergone a difficult period marked by subdued levels of trading and low liquidity. More recent factors, such as regional political turbulence and the sluggish recovery of the eurozone, have added to the challenging economic backdrop. However, Abu Dhabi’s exchange showed signs of recovery in 2012, with the general market index posting a gain of 10%. In 2013 and 2014 buoyancy was further consolidated, with the market entering the most rapid period of growth since the pre-2008 era. The main index grew by 1659 points in 2013 to close at 4290 – an increase of around 63%. This performance helped establish ADX as one of the top regional performers, ahead of Kuwait’s stock market (the main index of which grew by 27.2%), the Saudi Tadawul (25.5%) and the Qatar Exchange (24.2%).
Trading value on ADX increased significantly during 2014, amounting to around Dh145bn ($39.5bn), compared to about Dh85bn ($23.14bn) in 2013, an increase of some 70%. Volume reached around 58bn shares, compared with some 51.5bn shares in 2013, an increase of about 13%. Market capitalisation also increased exponentially in 2014, with listing companies adding an aggregate Dh15bn ($4.08bn) over the year to reach above Dh464bn ($126.3bn). In terms of sector performance in the third quarter of 2014, the investment and financial services index saw the greatest gains during the year, rising nearly 398.6%, followed by consumer staples (60.8%) and energy (52.9%).
In 2014 the Abu Dhabi general index continued to climb, peaking at 5253 points in May on the back of the MSCI upgrade coming into effect before closing at 4528 points at year-end 2014, a jump of 6% compared to 2013, when the index closed at 4290 points. The continuing decline in oil prices saw much of the gains eroded by year-end, as oil accounts for around 30% of the UAE’s real GDP, according to Suhail Mohammed Al Mazroui, the minister of energy.
“Regional markets experienced a sharp correction in early December on the back of sliding oil prices that was exacerbated by leverage-driven margin calls. In the weeks ahead any announcements relating to GCC government budgets for 2015 will be watched closely by investors,” stated the January 2015 “Markets Outlook” report from Invest AD.
“Any prolonged weakness in global oil prices remains a key macro risk for the region,” Sachin Mohindra, a portfolio manager at Invest AD, told The National, a local English-language newspaper, in January 2015. “A slowdown in implementation of infrastructure and other economic diversification projects is a related risk.”
Valuations & IPO
Given the market correction, however, there may be buying opportunities for investors. “The recent market correction brought down valuations of a number of well managed companies to attractive levels, especially considering underlying earnings growth,” Invest AD’s January 2015 “Markets Outlook” noted. “This makes us optimistic about the prospects of GCC equity markets in 2015.”
In the long term the authorities aim to broaden the exchange’s investor base. For many years ADX has succeeded in attracting interest from beyond the UAE’s borders. Of the almost 951,000 national investor numbers (NINs) issued on the exchange from its inception to end-2014, some 376,000 – or around 40% – were issued to foreign nationals. In 2014, 19,251 NINs were issued, compared to 15,856 in 2013, of which 17,942 were issued to individuals, 1304 to institutions and five to government agencies. Net foreign investment in ADX increased in 2014 to reach Dh3.5bn ($952.7m), compared to Dh2bn ($544.4m) at the end of 2013, a rise of 75%.
As for the distribution of NINs by nationality, UAE nationals accounted for 5946, while GCC nationals accounted for 929, other Arab nationalities for 6548 and 5828 numbers were issued for other nationalities. However, the bulk of trading activity on ADX continues to be dominated by local investors: in 2014 UAE nationals made up 58.9% of total trading value, followed by other nationalities (17.2%), Arab nationals (15.1%) and citizens of the GCC (8.8%).
Developing The Exchange
The participation of foreign and institutional investors, both of which foster greater liquidity and stability, has been aided by the emergence of ADX as a well-governed institution with a sound regulatory foundation. The number of foreign institutional investors registered with ADX increased by about 191% to 1106 institutions in 2014, compared to 380 in 2013. This rise brings the number of foreign institutional investors registered with ADX since its inception to more than 3500.
The SCA has expended considerable effort over recent years to enhance the regulatory framework underpinning market activity in Abu Dhabi and the wider UAE. Much of the impetus for reform was derived from the nation’s successful bid to achieve MSCI emerging market status for its exchanges, with many of these innovations beginning to bear fruit in 2014.
The year 2013 saw the SCA complete a programme of fund licensing, which has introduced a strong regulatory framework for both local investment funds and the marketing and licensing of foreign funds in the UAE. Among the new measures is a requirement that companies establishing local funds invest at least 3% of the fund’s capital themselves as seed capital; appoint an investment manager, administrative services company and custodian; and adhere to stringent reporting requirements. Foreign funds, meanwhile, must be approved the SCA and licensed to make a public or private offering. These new regulations, which replace the previous regime operated by the central bank, have resulted in an uptick in fund-related activity.
“We have actually seen accelerated fund growth, on average a new fund each quarter. We are also seeing more diversity in the fund arena, including real estate funds and private equity funds,” Ryan Lemand, head of risk management at the SCA, told OBG.
In April 2014 NBAD was 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. In the short term NBAD plans to create a market for the exchange’s sole listed ETF – the NBAD OneShare. Over the longer term the UAE market will benefit from more trading activity on a range of mid-and small-cap companies that are currently suffering from a lack of both liquidity and investor demand.
In 2014 the SCA also took a key step in its campaign to deepen the nation’s exchanges with the announcement of its covered warrants regulation. The introduction of warrants, which grant the holder the right (but not the obligation) to buy or sell an asset at an agreed price on or before a set date, is seen as a precursor to the introduction of options and futures regulations on the exchange – a long-held ambition of the regulator. In the meantime the SCA is continuing its push to enhance the level of investor relations (IR) in the market, with its efforts being aided by input from both of the UAE’s exchanges, HSBC and the Middle East Investor Relations Society. IR services are seen as essential for capitalising on the increased exposure that some of Abu Dhabi’s firms are enjoying following the MSCI decision, and the SCA has made the provision of IR services, such as dedicated sections on company websites, the hiring of IR officers and disclosures calendars, mandatory by incorporating them into corporate governance regulations. This initiative aims to enhance transparency and disclosure at the listed company level.
Abu Dhabi Global Market
While ADX continues to develop in terms of depth and complexity, Abu Dhabi will soon become home to a new centre of finance, with Al Maryah Island chosen as the location for a new financial free zone in the emirate. The landmark buildings, which have been developed around Abu Dhabi Global Market Square (formerly Sowwah Square) in recent months and years, are a testament to the government’s determination to establish a hub for local, regional and international financial institutions. While the financial centre will be broad-based, the first phase of its development will centre around three initial anchor sectors: private banking, wealth management and asset management. Abu Dhabi Global Market (ADGM) will have its own regulatory structure, an independent companies registrar and a financial services regulator. The zone will also operate according to its own judicial system – the Global Marketplace Courts – based on common law and comprised of a lower court and a court of appeal, both of which will be overseen by a chief justice. The interaction between this system and the UAE legal system will reportedly be supported by memoranda of understanding with other UAE judicial bodies.
ADGM will be the second financial free zone set up in the UAE, in close proximity to the Dubai International Financial Centre (DIFC). While some have questioned the potential for competition between the two entities, the ADGM authorities maintain that both zones will work in harmony rather than in opposition. “The UAE has grown sufficiently to support two financial centres,” Ahmed Al Sayegh, the chairman of ADGM, told OBG. “Overall, I believe the region will benefit from a strong, robust and active financial services sector. Together the pie gets larger, and collectively we are strategically located to service the growing economies of Asia, Africa and the Middle East.” Abu Dhabi has a long history of channelling capital and facilitating investment flows into high growth potential economies.
While the precise mix of financial and banking services to be established within ADGM is as yet unclear, the companies that will offer support services – such as consultancies Deloitte and Accenture and a roster of international law firms, including Baker Botts, White & Case, Reed Smith and Clifford Chance, among others – are already cultivating a presence on the ground.
Progress on establishing the regulatory regime for ADGM reached an important milestone towards late 2014 with the appointment of Richard Teng, the former chief regulatory officer of the Singapore Exchange, as CEO of ADGM’s Financial Services Regulations Bureau.
Looking To Afriica
In addition to the investment opportunities in Abu Dhabi, the emirate is working to promote trade within the wider Middle East and Africa region. Invest AD – the independently run asset manager owned by the Abu Dhabi Investment Council – is targeting global investors interested in accessing frontier markets, particularly those in Africa.
This push for greater regional involvement could see Abu Dhabi emerge as a new gateway to the Middle East and Africa, as intra-regional trade and investment pick up in the years ahead. “The depth and sophistication of Abu Dhabi’s financial institutions afford the emirate a unique value proposition compared to the rest of the region in that it has the potential to serve as a natural portal for those looking to do business in Africa, which is rapidly developing and is at the forefront of many investors’ minds,” Al Kudsi told OBG. In Morocco, for example, Invest AD was one of a handful of asset management firms to be granted Casablanca Finance City status, which should give it a foothold in the North and West African markets. In addition, Invest AD also offers investors exposure to African markets via its Emerging Africa Fund, which was launched in March 2012.
The fund has a total of $47.21m in assets under management, and its largest exposure is to Egypt with 29.93%, as per its November 2014 factsheet, followed by Morocco (16.68%), Nigeria (11%), Kenya (9.37%), Tunisia (7.61%), Zimbabwe (4.01%) and Mauritius (2.29%). Its three largest stock holdings are Commercial International Bank (Egypt, 5.47% weight), telecoms provider Safaricom (Kenya, 5.47%) and EFG Hermes Holding (Egypt, 4.82%), in line with the fund’s weighting towards banking, financial services and telecoms, along with materials and real estate.
The launch of ADGM, expected to take place in 2015, will mark the beginning of a new chapter for Abu Dhabi’s capital markets. The anticipated influx of financial services firms promises to transform the emirate’s image as a centre for buy-side financial activity – a reputation gained thanks to large investment firms such as the Abu Dhabi Investment Authority – to a jurisdiction that also includes a significant sell-side component, thereby establishing the emirate as a true centre of global wealth management.
In the meantime ADX is set to enjoy the fruits of its recent elevation from frontier market to emerging market status by MSCI. “The MSCI upgrade should result in a snowball effect as more and more institutional investors get involved in the market. Greater transparency and improved business operations are expected from companies trying to lure these investors,” Salem Al Noaimi, CEO and managing director of Waha Capital, an Abu Dhabi-based investment company active in principle investments, capital markets and industrial real estate, told OBG. Ultimately, the performance of the exchange is underwritten by the strength of its domestic economy. With one of the most business-friendly environments in the region, an extensive government programme of infrastructure development and expected GDP growth of 4.5% for the UAE in 2015, according to the IMF, the outlook for ADX remains a positive one.
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