Addressing foreign ownership limits solve liquidity crisis

• Text size
•  
•  

Dubai In real estate, it’s “location, location, location,” and similarly, it is “liquidity, liquidity, liquidity” when it comes to stock trading, said one online forum member of www.dubaisharetalk.com when in July volumes dropped to the lowest this year on UAE’s markets. “I think it’s going to be long, long, long summer.”

Last month, according to Bloomberg, UAE volumes were 71 per cent below their July 2009 levels with the local markets being the poorest performers in the region this year.

DFMDFM

Among the stocks which are commonly mentioned by analysts as good picks but have limited foreign ownership include National Bank of Abu Dhabi (25 per cent); First Gulf Bank (15 per cent); etisalat, which is not open to foreign ownership.

Dubai Financial MarketDubai Financial Market

The market witnessed a setback of sorts, when in November 2008 Abu Dhabi’s second biggest real estate company, Sorouh reduced the limit from 20 per cent to 15 per cent, which market observers at the time criticised. The company cited market volatility driving down prices, which was not reflective of the true value of the company, as a reason for the step taken.

Volatility

Emaar, still the bellwether stock of DFMDFM, was one of the earliest to raise the limit to 49 per cent from its then 20 per cent in 2005. And it is for all of us to see that the real estate giant, though a big sized company, has been and is the most liquid stock on the exchange now for years, and also subject to much volatility.

In June, MSCI Barra, which classifies markets rejected UAE and Qatar’s case for upgrading both from “frontier” to “emerging” market status. And one of the points raised by MSCI was in fact the issue of foreign ownership limits.

“Liquidity attracts liquidity and I feel that with increased instituitional investors coming into the market...These investors are much more longer term in their strategies and would complement the existing shorter term investors that look to speculate on these exchanges,” says Nicholas Wright, head of institutional brokerage at Mubasher Financial Services.

As for the overall market efficiency, fund manager of Al Mal Capital Tariq Qaqish would like to see more foreign participation to enhance the liquidity in the stocks. One of the prominent names and perhaps much desired by outsiders is the telecom giant etisalat. Allowing foreign ownership in etisalat will allow, for example, investors to get involved in the telecom sector rather than being constrained to predominantly real-estate or financials, says Wright.

He cites Emirates NBD as another example where currently just 5 per cent of shares are available to foreigners, and says increasing the limit will boost interest and liquidity, benefitting the stock.

But there is more to just injecting liquidity if foreign ownership restrictions are addressed by the regulators.

It would bring in more transparency and disclosure, as has already been happening, as foreign investors will demand it and will have the weight to do so, says Arabi.

“Most companies would benefit from a reduction of foreign ownership limits, as more foreign investment produces a more accurately valued share price and can improve trading volumes,” says Jeff Singer, chief executive of Nasdaq Dubai.

Arabi would like to see a reform at the federal level that enacts a law where by 49 per cent of all companies are effectively open for foreign investors as stipulated in the company laws. “As a second phase I would like to see ownership over 49% allowed to foreigners while keeping certain strategic sectors limited to 49 per cent,” he says.

A selection of companies based on active trading that allows less than ?49 per cent ownership

DFMDFM followed by ADX

Company name Country Foreign?of originownership %

DFM

Commercial Bank of Dubai (CBD)UAE0

Deyaar Development UAE0

Dubai Islamic Bank UAE15

Dubai Investment CompanyUAE20

Dubai Insurance CompanyUAE20

By Gaurav Ghose?Financial Features Editor

© Gulf News 2010. All rights reserved.