With a sustained return to positive territory for its main index, a crucial upgrade to “emerging market” status by Morgan Stanley Capital International (MSCI) and a 282% rise in share exchange value in 2013 over 2012, Abu Dhabi’s exchange has had a good year. The developments have generated new optimism regarding the exchange’s ability to attract liquidity, a goal which local and federal authorities have made a strategic priority.
Rapid Development
Abu Dhabi’s capital markets have developed rapidly since the commencement of formalised trading a little more than a decade ago, and progress is set to continue with a programme of platform development and the introduction of new instruments and processes. Although unregulated trading in company stock has existed in the emirate for decades, officially sanctioned market activity only began with the creation of the Abu Dhabi Securities Market (ADSM) in 2000, the first task of which was to persuade the emirate’s privately held companies of the advantages of a public listing. Local giants like National Bank of Abu Dhabi (NBAD) led the way in this regard, and by the mid2000s the ADSM had achieved its first foreign listings.
In 2008 the exchange was rebranded as the Abu Dhabi Securities Exchange (ADX) as part of a new phase of development which aimed to deepen the market through new products and add more foreign listings to the board. Since that time, the exchange authorities have turned their attention to ensuring that its platform and processes are capable of supporting this ambition, and the past year has seen technological developments at both the local and federal levels bring new functionality to the exchange as well as enhance the degree of data integrity. In 2012 the ADX announced that it had signed an agreement with NASDAQ QMX to upgrade the exchange’s trading system. The new platform, X-stream, is expected to be live in early 2014 and will provide the exchange with an electronic, multi-asset-class trade monitoring system that complies with international standards and practices capable of handling trading of equities, fixed-income products and exchange-traded funds (ETFs), with the possibility of adding new products such as options and futures at a later date. The last year has also seen the completion of an initiative, first announced in 2011 by the Securities and Commodities Authority (SCA), the federal body overseeing the UAE’s capital markets, that aims to enhance the quality of information provided by companies listed on the ADX and the Dubai Financial Market (DFM). As a result, the UAE has become the first jurisdiction in the GCC to introduce the eXtensible Business Reporting Language (XBRL) to its capital markets. XBRL runs on an XML-based computer software language that improves the way financial data is communicated and brings the ADX in line with leading exchanges. The result of the SCA’s efforts is an exchange better equipped to attract inward investment. “One of the problems for foreign investors looking at regional stocks is the lack of availability of financial data in electronic format. The introduction of XBRL was essential to enhance the availability, reliability and comparability of data. You can now compare the financial statements of a local company like Etisalat with a company listed elsewhere, like France Telecom, at a glance,” Ryan Lemand, senior economic advisor and acting head of risk management at the SCA, told OBG.
Regional Position
The continued technical development of the ADX is of particular importance in the context of its regional position. Despite having a small population of 9.2m in 2012, according to the latest Wold Bank estimates, the UAE is home to three bourses which compete for the interest of local, regional and international investors. The ADX and the DFM are owned by their respective governments and are regulated by the SCA, while 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.
With a total market capitalisation of Dh255.5bn ($69.5bn) at the close of 2012, compared to the DFM’s Dh181.9bn ($49.5bn) and the approximately Dh30bn ($8.2bn) of Nasdaq Dubai, the ADX is the largest of the three. Like many major markets around the world, the ADX has seen a sharp rise over the course of 2013, and its market cap reached $100bn as of October that year. Taken together with Dubai, which had a market cap of $58.5bn in the same month, the UAE’s exchanges had an overall capitalisation of $158.5bn, equal to 17.9% of the GCC’s total, according to the “GCC Markets Performance – October 2013” report by Global Investment House. This ranks it second in the region in terms of capitalisation, ahead of Qatar, with $145.8bn, but behind Saudi Arabia, with $432bn.
Merger
The possibility of a merger between the ADX and DFM has been an industry talking point for some time, with proponents citing both efficiency gains and the increased potential to attract international investors to a single UAE exchange as principal benefits of such a move. While an agreement has not been announced to date and no application for a structural alteration has been made to the regulator, according to reports in the international media in late 2013 and early 2014, the exchanges have hired banks to advise them on the value of a possible merger.
Abdullah Salem Al Turifi, CEO of the SCA, told OBG, “The SCA supervises both exchanges and has at interest their stability as gateways to the equity capital markets, but it does not interfere in corporate matters. A consolidation between the two exchanges is primarily a business decision between the two companies in terms of the infrastructure costs of the merger as well as cost savings, potential economies of scale and so on, and the decision to merge belongs to the leadership and board of directors of both exchanges.
On the one hand, looking at the market impact, there are certain positive aspects that a merger could bring to investors, companies and other stakeholders. On the other hand, these benefits would be subject to achieving successful post-merger integration, which is down to many variables that should be evaluated at the corporate, not regulatory, level. Regarding the SCA’s supervisory mandate, whether or not a merger takes place does not affect this mandate.”
Market Structure
For now, then, the ADX primarily reflects the local economy of Abu Dhabi. The nine sectors by which companies on the exchange are listed – banking, investments and financial services, real estate, consumer staples, industrial, insurance, telecommunications and services – illustrate the growing diversity of the emirate’s non-oil economy and the success with which the authorities have been able to attract listings to its main board.
As of the close of 2012, there were 66 companies listed on the ADX, with the largest sector being insurance, which accounted for 17 listings, followed by banking (14) and industry (13). With just two listings the energy sector is the smallest on the exchange, a result of the fact that the bulk of the hydrocarbons activity for which Abu Dhabi is famous is controlled by the government. The exchange is also home to nine open-ended funds, five of which are run by the emirate’s largest bank, NBAD, and a single debt instrument, the NBAD Convertible Note, which dates from 2006. While the secondary debt market is at a relatively undeveloped stage, both corporates and state-owned entities such as the Tourism Development and Investment Company, Mubadala Development Company and International Petroleum Investment Company have issued debt instruments in recent years, and since 2009 their approach to the markets has been coordinated by the Debt Management Office, which operates in Abu Dhabi’s Department of Finance.
While the government’s strong liquid position has not compelled it to reach for the debt markets, it has shown a willingness to establish a government debt programme through which a more comprehensive yield curve for corporate issuance might be created. The most recent government issuance was in 2009, but at the end of 2012 the Department of Finance indicated to the press that it was considering a sovereign dollar issuance in the short term.
Recent years have also seen the ADX move beyond vanilla equity and debt offerings to offer a broader range of securities. In March 2010 it announced the creation of the region’s first ETF – the NBAD OneShare Dow Jones UAE 25. The index-tracking fund allows investors to gain exposure to a wide array of asset classes – in this case 25 blue-chip companies from across the UAE – via a single low-cost, low-risk instrument, using a model that has proved popular in other markets. For now, however, the NBAD instrument remains the sole ETF on the bourse. “We do not have any more ETFs in the pipeline. The region has still not adopted the concept of the ETF yet, but it’s an exciting product. We are early adopters here. If you look at the international context, it took South Korea 10 years or so to get going with them,” Saleem Khokhar, head of equity at NBAD Asset Management, told OBG.
Tracking The Market
The principal monitoring tool of Abu Dhabi’s exchange is the ADX General Index, a capitalisation-weighted index of stocks listed on the exchange. To be included, a stock must have been traded at some time during the previous five days. Nine subindices track the economic sectors by which the ADX’s listings are classified. The market was also served by 52 licensed brokers as of October 2012, including locally based, dedicated firms, as well as the brokerage operations of large multinationals (such as HSBC Middle East Securities), regional players (such as EFG-Hermes Brokerage – UAE), UAE-based firms (such as Emirates NBD) and financial houses or banks originating in Abu Dhabi (such as First Gulf Financial Services).
Recent Performance
Like markets across the GCC, the ADX has faced a number of challenges since the onset of the global economic crisis in 2008. Subdued levels of trading and liquidity have become the norm throughout the region, while the sluggish recovery of the eurozone and the US has combined with political turbulence across the Middle East and North Africa to create an unfavourable economic backdrop. Nevertheless, the ADX has performed well in comparison to its regional peers and, after a subdued showing in 2011, has more recently returned to positive territory. The ADX general market index climbed from 2402.28 at the end of 2011 to reach 2630.86 by the close of 2012, a rise of 10%, while over the same period market capitalisation expanded from Dh232.7bn ($63.3bn) to reach Dh255.5bn ($69.5bn), a 10.14% gain. To place this result in context, the ADX General Index outperformed the main Dow Jones index in the US and the principal exchanges of Saudi Arabia, Kuwait, Oman, Qatar and Bahrain. This trend was carried over into 2013; the ADX General Index closed the first half of 2013 at 3551 points, a year-to-date gain of around 35%. As of early December 2013, the index was at nearly 3920 points.
Looking at recent sectoral performance, in 2012 the banking sector accounted for the largest portion of domestic market capitalisation (52.3%), followed by telecoms (28.1%) and energy (4.48%). At a company level, Etisalat maintained its dominant position with a capitalisation of Dh71.7bn ($19.5bn), or 28.7% of the total market, followed by NBAD, which by the close of 2012 had a market cap of Dh40bn ($10.9bn), or 16% of the market. On the process side, while trading value by the close of 2012 showed a year-on-year (y-o-y) decrease of 10.5% to Dh24.9bn ($6.8bn), the volume of shares traded on the ADX rose by 3.4% from 15.8m units traded in 2011 to 16.3m units in 2012.
In terms of both value and volume, the real estate sector was first with Dh8.7bn ($2.4bn) and 8.9bn units, respectively. On the debt side, bonds worth Dh147.1m ($40m) were traded on the ADX in 2012, a 41.7% increase on the Dh85.7m ($23.3m) traded in 2011.
Investore Base
The ADX has also continued to attract investment from beyond the UAE. Of the 915,387 investor numbers that were granted to customers of the exchange from its foundation to the end of 2012, some 350,601, or around 38%, were issued to foreign nationals. The majority, some 30% of total investors, came from elsewhere in the GCC, but 48,176 numbers were issued to non-GCC Arab investors, and 29,522 to investors from other parts of the world. Looking at the investor base in terms of type, the ADX is dominated by individual investors. In 2012, they accounted for around Dh16bn ($4.4bn) of the buy trades conducted on the ADX, while companies took another Dh6bn ($1.6bn) and the government around Dh600m ($163.3m). In terms of net investment (taking into account sell trades), institutional investors accounted for Dh11m ($3m) in 2012, while individuals invested Dh37.3m ($10.2m) in the exchange over the same period. Net foreign investment reached Dh995.4m ($270.9m) in 2012, compared to Dh60m ($16.3m) in 2011, with highest level of investment sourced from outside the UAE coming from the US (Dh329.5m, $89.7m), followed by Qatar (Dh322.6m, $87.8m) and Switzerland (Dh211.4m, $57.5m).
MSCI UPGRADE: One reason for the increased interest in the ADX from abroad over the past year was an announcement in June 2013 by MSCI that it will upgrade the ADX and the DFM to its influential Emerging Markets index in 2014. An anticipatory uptick in inward capital flows was registered on the ADX before the news was officially released, and in the wake of the MSCI decision yet more investment is expected.
The shift from “frontier” to “emerging market” status represents an important vote of confidence in the ADX. It also has the potential to bring increased inflows of liquidity from the thousands of international fund managers who track the MSCI index. Moreover, increased liquidity may provide a greater incentive for initial public offerings, the occurrence of which has slowed since 2008, as well as cross-listings from regional firms keen to gain emerging market exposure.
Regulatory Reform
A long process of regulatory enhancement has been central to the ADX gaining emerging market status. Both local and federal bodies have played a part in this process. The existing regulatory framework grants the ADX considerable freedom to set its own growth agenda, with Local Law No. 3 of 2000 defining the ADX as an autonomous body with full supervisory and executive powers over its processes. The ADX carries out its duties in tandem with the SCA, which acts as the federal regulator and governs the country’s capital markets according to Federal Law No. 4 of 2000. A third tier of regulation exists in the form of the UAE’s Ministry of Economy, which the SCA must defer to if it wishes to address the legislative framework, rather than regulatory framework, according to which the capital markets are governed.
The past year has seen a number of significant regulatory changes in terms of both market processes and standards. In August 2012 the SCA introduced three new regulatory changes (Board Decisions Numbers 46 to 48) which have added a greater degree of depth to the market by allowing for market making (the practice of a broker or dealer holding shares in a security, offering a buy and sell price for them, and seeking a profit in the spread), the lending and borrowing of securities (which enables the lending of stock to an investor or firm, usually for a fee) and short selling (which will allow Abu Dhabi’s brokers to lend stock to customers who wish to go short on an equity that they believe will decline in price). Each represents an important new capacity for the ADX, and the increased sophistication they bring to the market places the ADX in line with other developing exchanges. Moreover, the availability of such new tools has the potential to boost trading activity and volume on the ADX, as well as provide Abu Dhabi’s brokerages, which have suffered a slowdown in business in the wake of the global economic crisis, with new revenue streams.
In addition to providing a regulatory framework for new products, the SCA has turned its attention to market standards, in particular in relation to funds. In July 2012 the SCA introduced a new regulatory framework by which investment funds in the UAE are to be operated, and in August 2013 the grace period during which fund managers were asked to comply with the new standards came to an end. The regulations apply to both locally established and foreign funds, and address, inter alia, the areas of licensing, investment policies, asset evaluation, financial reporting and fund promotion. “The point of the regulation is to increase transparency and reduce risk in the system. We received a significant number of fund registration applications to deal with in 2013, but have cleared them all, and at the moment we are taking about three days to process registration requests,” the SCA’s Lemand told OBG.
Outlook
As with all exchanges, the growth of the ADX is inextricably linked to the national economy. In 2012 the GDP of Abu Dhabi expanded by 5.6% y-o-y, at constant prices, and going forward the government has forecast annual expansion of 5.7% between 2013 and 2016, a level of growth which bodes well for the ADX. The MSCI upgrade, which will come into effect in 2014, also promises to bring new liquidity to the market, which in turn will make the ADX’s job of attracting new listings easier. In the meantime, the SCA and ADX authorities intend to continue the process of market reform. Another priority in the short to medium term is addressing investor relations (IR), an area where the SCA has teamed up with both of the UAE’s exchanges, HSBC and the Middle East Investor Relations Society to introduce systemic improvements. Considered essential to capitalise on the increased exposure some of Abu Dhabi’s firms will enjoy as a result of the MSCI decision, the SCA is considering making the provision of IR services, like websites and dedicated personnel, mandatory in the future, incentivising firms to comply with awards in category, listings according to an IR charter. Certainly, such a move would represent another significant phase in the ADX’s trajectory towards its next target – achieving the status of “developed market”.
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