Investors wait for upgrade

Tuesday, Dec 13, 2011

Dubai: In the searing heat of a UAE summer, the United States was still considered an AAA' country, Greece was the Eurozone's key concern and Dubai's benchmark stock exchange hovered around the 1,600 mark.

There was a real buzz around the country as investors built positions ahead of a much-anticipated upgrade to emerging market status by index compiler MSCI.

It was not exactly a halcyon era for the global economy but those days now seem relatively sanguine compared to the situation most nations find themselves heading towards the turn of the year.

Of course, we now know the UAE and Qatar's hopes of an upgrade from frontier status were put on hold by MSCI to allow market participants to asses the impact of recent changes.

Negative sentiment has deepened in the intervening months ahead of tomorrow morning's rescheduled announcement, which takes place after 2am UAE time.

Global woes

Europe's debt problems have swept across the entire region with heavyweight nations Spain and Italy struggling to rein in dangerously high borrowing costs and austerity packages are taking effect in most advanced economies.

The MSCI decision ultimately rests on technical improvements made to local markets, including permitting higher levels of foreign ownership and easing the share transaction process.

However, global woes and local market performance tend to be intertwined with negative sentiment leading to higher levels of risk aversion when it comes to investing in equities, which in turn affects liquidity.

The temperature in the UAE may have cooled as we approach mid-December but markets are feeling the heat. The Dubai Financial Market (DFM) has lost 11 per cent since MSCI postponed its classification review on June 21. The Abu Dhabi Securities Exchange (ADX) has dropped more than ten per cent in the same period.

"The main reason MSCI delayed its decision in June was due to foreign ownership and liquidity related issues," said Fat'hi Bin Grira, the chief executive of Menacorp, an Abu Dhabi brokerage.

"There have been some good decisions taken by the local authorities since then in terms of introducing new draft regulations that look at things like short selling. There is a lot of good will but not a lot of changes that have had much practical impact.

Available cash

"Local investors would certainly see an upgrade as good news and many of them would [put] money back into the market if the announcement is positive. However, an expected inflow of foreign investors will not happen immediately as there is not much cash available and they will have to get used to the market," he added.

Bin Grira also says Menacorp is exploring potential merger opportunities with other local brokerages amid a tough backdrop for equities. "Our brokerage has not budgeted in an MSCI upgrade. It is a good thing that some brokerages have ceased operations as we cannot have more brokerages than listed companies; it does not make any sense," he said.

"Volumes are really low and we are exploring different options. There were more than 100 brokerage firms in the UAE last year but we expect there to be around 50 by the end of 2011," he added.

Excitement surrounding the MSCI announcement is not exactly palpable with trading volumes remaining thin over the last few weeks. Some analysts are also questioning whether an upgrade would have much effect, especially in the short term.

The volume of shares traded in Dubai has plummeted to a daily average of about 107 million against 161 million in 2010 and 470 million in 2009. However, local markets received a boost last week with the issuing of a draft companies law, which allows the UAE Cabinet to issue a resolution that would permit certain firms to raise foreign ownership limits beyond the current 49 per cent.

Positive changes'

"I think the UAE has a better chance of an upgrade this time round. The macro-economic environment does not impact the mechanical steps that have been taken to improve our markets," said Haissam Arabi, chief executive and fund manager at Gulfmena Investments.

"The delivery versus payment (DvP) settlement system is in place and there have been other positive changes. Some companies, such as First Gulf Bank, have upped their foreign ownership ceiling to 25 per cent to better their chances of being included in any potential upgrade," he added.

Arabi says the new companies law was introduced with the intention of boosting the UAE's chances of an upgrade, adding that low liquidity is not just a problem facing the UAE.

"The law will apply to listed companies although we have not been given the allowances per sector. Liquidity is relatively low everywhere; volumes have plummeted across emerging markets so in that respect we are in line with everybody else," he said.

MSCI is also likely to take a positive view on recent moves by the Securities and Commodities Authority (SCA), the UAE market regulator, to introduce a series of new regulations, which cover market making, securities lending and short selling.

Furthermore, The Arab Federation of Exchanges (AFE) recently launched the S&P AFE 40 index in partnership with S&P Indices. The index is designed to measure and evaluate the performance of the 40 most powerful companies in the region.

These measures combined suggest the emergence of a more mature market in the UAE, which is thought to have considerably more chance of an upgrade than Qatar because its foreign ownership limits remain at 25 per cent.

WHAT IS THE MSCI

Morgan Stanley Capital International (MSCI) is the investment services provider of the New York-based investment bank Morgan Stanley.

It provides a range of services to investment institutions across the world including various indices and performance analytics, allowing investors to manage their equity, fixed income and asset class portfolios.

The MSCI World stock market index, launched in 1969, contains more than 6,000 stocks from 24 of the world's most developed equity markets including the United States, Germany and Japan.

Possible scenarios