Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@refinitiv.com.

1) Which of the Gulf’s capital markets would you highlight as having the best overall set-up, and why?

Capital markets have evolved differently in the various Gulf countries to serve the specific needs of those countries, so the set-up that they have in place is usually there for specific reasons. I think what is more important is that many of the region’s capital markets are seeking to develop and modernise, in some instances as part of their country’s desire to diversify the economy away from oil income and develop other industry sectors. As part of this, I see a trend by regional regulators to focus on, and adhere to, international capital markets standards. This is a necessity to attract more foreign direct investment into domestic capital markets. The evidence that this has a tangible effect can be found in the increasing number of Gulf countries that have been upgraded from frontier markets status to emerging markets status by MSCI.

2) Which developments that have taken place over the past 12 months that have encouraged you most?

Several developments are worth mentioning:

  • the ongoing ability for sovereign (and corporate) issuers of debt, including sukuk, to come to market has helped to establish a more vibrant debt market. This, in turn, will help establish more reference prices for others to use. All this, of course, in the absence of proper fully-established sovereign yield curves;
  • the development of the Nomu market in Saudi Arabia, servicing the finance needs of small and medium-sized enterprises. I would anticipate seeing other Gulf countries try to emulate this success; and
  • the inclusion of the Dubai Mercantile Exchange benchmark price into the Saudi Arabia and Bahrain price marker for crude delivery. This is a major step forward for the establishment of a proper, exchange-traded, ‘east of Suez’ oil price.

3) What major improvements do you expect to occur in Gulf capital markets this year?

During 2019, and into 2020, we expect to see:

  • the continuation of the introduction of central counterparty clearing (CCP) services and the removal of bilaterally-cleared securities transactions;
  • further cross-border activity by regional brokers;
  • an increased focus on sustainability in capital raising transactions, and the ‘greening’ of financial markets; and
  • the arrival of tokenised share trading platforms, and accompanying custody providers, as regulated activities.

4) Aside from those markets that have witnessed higher inflows due to index inclusion, many Gulf equity markets have lacked liquidity recently. Why is this? What could be done to improve this?

There are several different issues driving the liquidity of equity markets. I’ll mention three of them. Firstly, a number of companies listed on regional equity markets have a small free float - that is, a low proportion of the company’s equity is actually available for trading. The absence of a substantial free float doesn’t encourage liquid trading of that equity. Secondly, not all markets have taken steps to allow broking firms to act as liquidity providers or market makers. Both roles have a part to play in encouraging liquid markets. This also includes allowing short-selling, which is an essential element to market-making and which not all regional markets have introduced. Thirdly, total transaction cost in many markets in the region does not encourage active trading patterns and discourages the proprietary trading firms associated with that type of activity. Many of the region’s institutional investors tend to be ‘buy and hold’ investors.

On a longer timescale, the development of ongoing capital flow from national pension funds into domestic markets would enhance liquidity as well. Apart from a consistent flow in, reweighting of portfolios and the development of associated derivatives markets would have a secondary boosting effect on the primary liquidity of the markets for shares.

5) What’s your view on the development of the region’s fixed income markets, and what can be done to encourage their development?

There are two aspects to the region’s fixed income (FI) markets. Firstly, the demand for shariah-compliant instruments, which will continue to grow. Nasdaq Dubai is the leading centre in the region, and globally, for the listing of sukuk, and I expect to see this develop further. Secondly, regional governments have gone to the markets to raise funds a number of times over the last 18 months or so. We expect to see several governments continue to issue instruments, both to meet budgetary needs and so that a proper yield curve can be developed in FI markets.

We see opportunities for enhancement in the region around the transparency of transactions in FI. Of course, sukuk do not necessarily trade on a public market, but regulatory objectives around transparency and integrity of the markets may be better served if a transaction reporting regime were in effect. Allowing more seamless cross-border offering of securities, or even EU-style passporting, is another area where we see potential for the deepening of regional markets. More alignment in standards is a necessary precursor to this; dialogue and cooperation between regulators is another.

6) Several Gulf markets are adding central clearing platforms, and/or offering some form of derivatives trading? Why is this useful and what could be done to improve their use?

Central clearing has the potential to improve risk management and the speed and certainty of transactions on the region’s markets. However, there is always the question of how many central counterparties (CCPs) or central securities depositories (CSDs) the region needs. Whether the time is right for a single CCP in the Gulf region is a question for the controllers or shareholders of those exchange operators. Developing CCPs could also bring more efficiencies to the region’s markets, both in terms of capital allocation and in the mitigation of counterparty risk, while allowing more margin-based trading,

The trend globally is away from vertical integration of markets (that is, exchanges owning and operating all components of the trading, clearing, settlement and custodian process) towards specialisation. For the region, it would be a good aspiration to have a single CCP and/or CSD, but identifying and bridging legal gaps in securities and insolvency laws would be needed to achieve this ambition, and this may take years. It certainly took a long time in Europe.

On derivatives trading, there are some interesting developments, such as Nasdaq Dubai offering a suite of equity futures based on equities listed on the Dubai (DFM), Abu Dhabi (ADX) and Saudi Arabia (Tadawul) exchanges. More generally, provision of derivatives trading facilities is part of the maturing of the region’s markets, which would normally lead to a broadening of the range of products and services offered.

7) How much of an issue is insider trading in the region, and what is the best way of stamping it out?

The prior question is how high is the quality of corporate governance in the region? Countries where corporate governance standards are high tend to see less insider trading in their markets, because the companies themselves deal with inside information in a proper manner, including making market announcements in a timely fashion, and taking steps to ensure that insiders do not act on any information they hold.

The best way to deter future insider trading is for the region’s markets and regulators to scrutinise trading and - when inappropriate activity is identified – to investigate that activity, and hold those responsible to account. That does mean regulators taking enforcement action and publicising the details of the action they take, including the individuals and companies who are the subject of that action.

8) What role does the CISI play in improving the financial sector?

The CISI plays two key roles in the development of the financial sector. Firstly, as a professional body committed to the highest standards of ethical behaviour and integrity, it expects its members to meet these same standards and, therefore, to act appropriately in all their dealing with clients. Secondly, as an educator, it provides a route for individuals to improve their knowledge of financial markets and the finance industry, and to demonstrate this knowledge by passing exams to gain CISI qualifications.

Both the encouragement of the right ethical outlook, and acting with integrity, and the improvement of the level of knowledge and expertise in the industry are significant contributions that the CISI makes in the Gulf region, as well as in many other markets.

Looking to the future, the arrival of faster and more far-reaching business models will also put pressure on the incumbent industry to find and train people who understand these developments well. CISI can play a key role in facilitating that.

9) Which technological developments will have the greatest impact on Gulf capital markets?

It’s important to remember that capital markets already include businesses that make significant use of technology. We sometimes forget – in the enthusiasm for fintech and other developments - that the financial services industry has been technology-based and technology-driven for many years.

But having said that, it is clear that developments in the use of Distributed Ledger Technology could have significant impacts on markets. Many capital markets around the world are looking at the use of DLT, especially for the clearing and settlement side of market business.

At the DFSA we have been approached by a variety of solution providers offering innovative approaches to Dubai’s - and the Gulf’s - capital markets. To accommodate this process, the DFSA has created a testing environment where financial services companies can test their applications, the market they are targeting and their regulatory model. We have seen firms as diverse as a robo advisor; a shariah-compliant custody provider and debt capital arranger; a firm tokenising shares to enable smaller companies to raise financing; and others. In one form or another, these firms - and others like them - will reshape the face of Gulf capital markets in the years to come.

10) What changes could be made to improve retirement planning for those working in the region?

Retirement planning means different things to different people. GCC nationals, of course, are part of pension schemes established and run by the governments of Gulf countries. Expatriate workers – of whom there are many – generally have some form of End of Service Gratuity (EOSG) provision, required by law in most Gulf countries, and provided by employers.

However, this is not a static position. The EOSG regimes in several countries were designed at a time when expatriate workers came to the Gulf for a few years (say, 3-5 years) and then moved on. Nowadays, especially in the UAE, expatriate workers are staying for greater proportions of their careers, as one would expect as the economy of a country like the UAE continues to develop and mature. It is, therefore, more and more important for these individuals to plan for their retirement while they are working here in the Gulf. Recognising this need is the first step.

Many people need help with retirement planning, so the provision of financial advice is a key issue. While the provision of financial advice, including retirement planning, has certainly improved in the UAE, the market I am most familiar with, there is still considerable room for improvement. Regulatory changes, particularly to take steps so that the interest of advisors and their clients are properly aligned, are needed.

11) What can be done to improve the standards of financial advice offered to Gulf residents?

Another way to improve the standards of financial advice is through ‘raising the bar’ in relation to the expertise, knowledge and skills that financial  advisors need to have. Regulators can do this in a number of ways, including by requiring aspiring financial advisors to have qualifications at a certain academic level, or specific named qualifications. The CISI would, of course, be able to provide qualifications in both these situations, as part of its role as an educator. Equally important is to require advisors to keep their knowledge and skills up-to-date. Continuing Professional Development (CPD) is a well-established concept in many professions, such as for doctors and accountants. Requiring CPD for financial services industry staff, including financial advisors, means that a certain level of time each year needs to be devoted to the maintenance and development of skills and knowledge. This can only be a good thing for the clients of these financial advisors.

(Editing by Gerard Aoun and Michael Fahy)


Any opinions expressed here are the author’s own.

© Opinion 2019