Stock markets have failed to make the changes required to upgrade the UAE to "emerging" market status, according to the influential investment research firm MSCI Barra. But MSCI said yesterday it would keep the UAE under review for a possible promotion from the existing "frontier" label next year.
Many large institutional investors allocate funds based on MSCI's classification, and an upgrade normally comes with a large injection of liquidity. Stocks on the Dubai Financial Market (DFM) fell 1.4 per cent on the news, while the Abu Dhabi Securities Exchange (ADX) lost 0.4 per cent. "It was disappointing when we saw this," said Elie Ghanem, the product development manager for the ADX. "The good news is we're still on their radar."
MSCI said the country's regulator, the Emirates Securities and Commodities Authority (SCA), had shown progress on several important issues since the review last year. But it remained concerned the regulator did not require brokerages to separate custodial accounts from trading accounts, giving local brokers unlimited access to the trading accounts. It is standard practice in developed and emerging markets to operate with the two accounts.
The SCA has said in the past it was working to implement the necessary changes. Officials said yesterday they could not comment on the MSCI report. MSCI said it would "welcome a public road map from the regulator and the exchanges providing visibility on the timetable of implementation of these changes". Qatar was also considered for an upgrade to emerging market status, and MSCI elected to keep it within the frontier market category as well. The decisions comeat a challenging time for regional bourses. Trading volumes are markedly lower, and on Monday one of the ADX's most prominent firms, Aabar Investments, said it was considering delisting its shares.
"I would say (the MSCI decision) is disappointing but we were of the view that it was inevitable. The markets were not quite ready," said David Lepper, the head of UAE equity research at HSBC. Mr Lepper said an upgrade to emerging market status would provide UAE stocks with exposure to a much larger pool of assets, but he added "the international investor is still very interested in the region and will become more interested if these issues are resolved".
Others in the investment community said they thought it was significant MSCI focused on the account concerns and did not note other issues that had been challenges for local markets in the past. "I think it's extremely positive that it's just the accounts rather than transparency, or disclosures and liquidity, because structural issues can be fixed," said Saad Chalabi, the institutional trader at AlRamz Securities in Abu Dhabi.
MSCI also noted it was "encouraged" by other changes planned by the SCA, including an increase of foreign ownership limits on Emirati companies. The country's two telecommunications firms, Etisalat and du, are not open to foreign investors, and banks in the UAE limit foreign ownership to between 15 and 49 per cent. The research firm has said it would also like to see local markets convert to what is known as a delivery versus payment (DVP) system for settling trades.
As it stands, stocks are traded through a matchmaking system in which a seller does not receive money until two days after the trade is executed. Under the DVP structure, the seller would receive the money on the day of the trade. Mr Ghanem said the ADX had several proposals in the works that would satisfy MSCI's concerns. The DFM is working on similar initiatives. halsayegh@thenational.ae
breagan@thenational.ae