Markets rising as more investments kept at home; merger between main markets might occur. Published in Euromoney, June 2014
The UAE is preparing for its imminent upgrade to emerging market status in a move that should help to cement the recent gains made by the country’s two main stock markets, the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX).
After several years of waiting, the country will be officially lifted from frontier market status by stock market indexing firm MSCI on June 2, along with Qatar.
It comes as confidence in the markets appears to be growing, particularly among local investors. The main indices of the DFM and ADX have both crossed the 5,000-point mark in the past few months, the first time this has happened since the summer of 2008.
One of the main reasons for these gains, according to observers, is that regional investors are increasingly willing to keep their money in the region rather than insisting on investing it in other parts of the world.
"A lot of regional investment institutions – governments, quasi-government bodies, pension funds, local institutions, publicly traded and privately owned companies – are all committing more assets to the MENA region, whether in debt or equity," says Anwer Abu Sbaitan, chief executive of Dubai-based Rasmala Investment Bank. "Partly because of the Arab Spring, regional investors now want to invest in their local economies and create more jobs as well as support the growth of infrastructure."
Statistics for the opening quarter of the year on the DFM highlight this trend. Average trading values reached Dh1.77 billion ($482 million) a day in the first quarter of 2014, 429% higher than the Dh336 million in the same period of 2013.
One thing that has been missing, however, is new listings. In recent years UAE companies have preferred to list their shares in London or New York than on a local bourse. Emaar Malls, a subsidiary of local property developer Emaar Properties, is one of the only companies known to be preparing a domestic listing, perhaps encouraged by the willingness of the authorities to relax some listing rules.
Emaar announced in March that it wanted to list 25% of its shopping malls subsidiary, raising up to Dh9 billion through a secondary offering of shares. Until now many companies were dissuaded from listing by a requirement that they had to sell 55% of the business. Allowing a listing of just 25% of the equity removes one key hurdle, although the wider use of book-building processes to set the IPO price would also help, according to some finance industry executives.
In any event, the combination of greater interest from regional investors and the MSCI upgrade should also attract more new issuers in the future, according to Peter Baltussen, CEO of Commercial Bank of Dubai.
"We’ve already seen that liquidity has dramatically increased this year compared with last," he says. "That’s partly because of the MSCI upgrade, but also because investors are feeling a lot more confident with the local markets. The IPO market has been inactive recently, but with so much interest in the stock market and the valuations at decent levels, potential issuers think they can get a fair price for their shares."
In another move that should help to expand stock market liquidity, the Securities & Commodities Authority (SCA) issued its first market-making licence to the National Bank of Abu Dhabi in April. The bank is expected to start providing this service in the third quarter of the year.
If a merger of the two main exchanges in the UAE does go ahead, that too could add more depth and breadth to the markets. There has not been any official confirmation that such a move will go ahead, but the idea is being widely discussed in the financial sector.
"It is likely that the merger of the DFM and ADX will happen because it makes a lot of sense," says Khaled Sifri, CEO of Emirates Investment Bank. "It may take a bit of time for it to happen because, as in many things, the devil is in the detail and there are lots of mechanics to be worked out, but I think it is sensible. It serves the purpose of both markets. One big market will perform better than two smaller markets."
The revival of talk about a merger comes at a time when Abu Dhabi is trying to assert itself as a regional financial hub, with the establishment of the Abu Dhabi Global Market free zone. That might yet lead to competition increasing between the two emirates in other areas of financial service.
"I’d be very pleased to see a merger between the DFM and the ADX happen," says Simon Williams, chief economist at HSBC Middle East. "I’d be happier if that felt like the beginnings of greater coordination and cooperation across the two emirates."
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