Even if MSCI says no, at least people are talking about us

The region's stock exchanges have a lot to think about ahead of Morgan Stanley's decision on whether to include them in its MSCI emerging markets index.

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The Irish writer Oscar Wilde summed it up perfectly. "The only thing worse than being talked about is not being talked about," he said, referring to the double-edged nature of rumour and publicity.

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The region's stock exchanges, particularly in the UAE and Qatar, might agree with that sentiment in the run-up to an event that many investors believe is crucial to the future financial health of the region.

In June, Morgan Stanley Capital International, part of the giant US investment bank, will decide on whether to include the two Gulf markets in its MSCI Emerging Markets index.

In Doha, Dubai and Abu Dhabi, they are fervently hoping they will be talked about as members of the emerging markets (EM) club, rather than remaining on the fringes of global investment as "frontier" markets.

If they make the jump to EM status, those exchanges will be included alongside such powerhouses as the Bric countries (Brazil, Russia, China and India) as well as economic giants such as Turkey, Mexico and Indonesia.

This kind of investment categorisation is never entirely satisfactory. For Qatar to be grouped with China as an EM seems wholly artificial. For China still to be regarded as "emerging" at all seems increasingly silly; maybe when its economy overtakes the US in size in a few years time it will stop emerging and become just plain "dominant".

But Qatar and the UAE will not want to argue about the semantics. Inclusion in the MSCI EM index will bring with it exposure to the estimated US$450 billion (Dh1.65 trillion) of finance currently managed by EM funds, and put both country's markets firmly on the investment map.

At the moment, both are included in the MSCI Frontier Markets (FM) index, which covers such minnows of the investment world as Bangladesh, Mauritius and Trinidad and Tobago. With the greatest respect, any self-respecting stock market would not want to be talked about in the same breath as those three.

Qatar and the UAE have been in this situation before. Last year, the MSCI deliberators were similarly considering whether to promote them, and decided against, mainly because their settlement systems were regarded as not quite up to scratch. (I wonder, though, how they compare with settlement in, say, Colombia, which is a member of the EM club.)

Since that disappointment, both countries have taken corrective measures. The UAE will introduce a "delivery versus payment" (DVP) settlement system by the end of this month, it has promised.

The MSCI authorities also had concerns about foreign ownership rules, regarded as a hindrance to investment in both countries but especially in Qatar, where foreigners cannot own more than 25 per cent of quoted companies. There is still time for Doha to lift that limit, probably by royal decree, which would more or less guarantee EM status for Doha.

Apart from the DVP factor, there was another problem in the minds of MSCI when it looked at the UAE last year: the Emirates was not then (and still is not) a unified market as Doha is. There were three stock exchanges, one in Abu Dhabi and two in Dubai, which was regarded as excessively confusing for a country of only 5 million people.

Since then the introduction of a common platform between the two Dubai exchanges has gone some way to addressing the issue, and Morgan Stanley is said to be working on a plan to merge the Abu Dhabi and Dubai markets. But whether that will come to fruition in time for the MSCI verdict is unclear.

In the Dubai financial community, the subject is a hot topic, and two separate rumours are doing the rounds in the Gate complex.

One is that MSCI was initially minded to block UAE promotion to the big league but has come under pressure from international investors keen to see the Emirates included and will now announce a six-month extension to the judging process. An announcement will be deferred until next January, it is whispered.

The other rumour, which could just be a different version of rumour number one, is that MSCI will announce next month that Qatar is in but that the UAE is not. That would be a blow to the UAE markets for sure.

I think, on the whole, that MSCI will not take such a drastic step; after falling out with Saudi Arabia (still not in the EM index) in 2009, it would not want to make another enemy in the Gulf.