All eyes on emerging market status

An upcoming decision on the upgrade of the UAE to emerging market status is expected to hold sway over local markets this week.

The Dubai Financial Market General Index was up 2.8 per cent to 1,600.98. Jeffrey E Biteng / The National, Bloomberg News

A market-swaying decision is expected on Tuesday about whether the UAE will be upgraded to "emerging market" status by the index compiler MSCI.

"The UAE should be strong whether they get the upgrade or not," said Haissam Arabi, the chief executive of Gulfmena Investments in Dubai. "With the current direction markets are moving, investors are betting on the UAE getting emerging markets status, so we should see markets perform well."

Abu Dhabi's benchmark, the Abu Dhabi Securities Exchange (ADX) General Index, advanced 2 per cent last week to 2,761.48 points after reaching a 23-week high on Thursday. The Dubai Financial Market General Index was up 2.8 per cent to 1,600.98.

The UAE is under review for an upgrade by MSCI, which is expected to say on Tuesday whether it considers the country an "emerging" market. The MSCI currently categorises the UAE as a "frontier" market. An upgrade could attract new liquidity to the country's bourses and drive index fund investment, which has steadily declined in recent years.

The value of stocks traded on UAE bourses is Dh36 billion so far this year. At that rate, the value of total trading would be about Dh70bn at the end of the year. In 2008, trading on the bourses was worth Dh530bn.

Dubai's benchmark index has fallen by more than 80 per cent since reaching a high in 2005. The ADX has declined almost 50 per cent in the same period.

For foreign investors to find UAE stocks attractive, local investors must first be active, said Mohammed Ali Yasin, the chief investment officer at CAPM Investment in Abu Dhabi.

"The MSCI inclusion [would be] positive for the UAE markets, but it is only another tick box in the things-to-do list to improve traded value and investor sentiment," Mr Yasin said. "International investors will not increase volumes if the local investor largely remains an inactive player."

Others say an upgrade will be a driver for transparency and fairness, strengthened by the presence of foreign investors.

"If we do get upgraded, it will also help improve transparency as institutional investors, such as governments, pension funds, asset managers, will push markets to trade within stronger rules and regulations," said Ameed Kanaan, the general manager at Al Jazeera Financial Services, a Dubai brokerage.

An upgrade would also increase the correlation between global markets and the local markets, Mr Kanaan said.

"The dominant local investor is speculative, with institutional investors remaining a handful, which means that if we do get upgraded, our markets will be much more sensitive to international global themes as foreign investors enter and exit local stocks," he said.

The Government of Dubai launched a US$500 million 10-year bond on Wednesday, with the emirate preferring to issue a smaller size in return for a lower yield.

"The fact that it was covered three times means that investors still have appetite and trust the UAE, and Dubai in specific," Mr Kanaan said. "It is positive considering previously there was an element of risk."

Abu Dhabi's Tourism Development and Investment Company has appointed managers to sell bonds from its existing $3bn bond programme, with presentations to investors planned for the last week of this month or early next month, Reuters reported.

"The bond issuances will help to boost property stocks, Aldar Properties and Sorouh Real Estate," Mr Kanaan said.

Corporate earnings season is also expected to begin soon for the GCC. The second quarter ends on June 30. Mr Arabi said regional market prices were yet to catch up with earnings growth.

"GCC corporate earnings were up 19 per cent on average in the first quarter, while markets did not go up by 19 per cent, weighed by the Arab Spring," Mr Arabi said. "So if second-quarter results come out better than expected, we may see markets filling that gap."

Elsewhere in the region: Qatar's index rose 0.5 per cent to 8,319.65 for the week; Oman's was unchanged at 6,021.12; Bahrain's slipped 0.1 per cent to 1,345.21; and Kuwait's rose 0.4 per cent to 6,336.90. The Saudi Tadawul All-Share Index declined 0.68 per cent to close at 6501.25 yesterday.