More unwanted news for the markets

MSCI Barra cites need for more regulatory changes in UAE

UAE markets sorely needed some good news but awoke yesterday to just the opposite. The decision by the New York research firm MSCI Barra not to upgrade the UAE to "emerging market" status was the latest in a series of setbacks to the country's bourses. Volumes as well as most share prices have been down sharply in recent months, to the point that several firms now trade beneath 40 fils, the level at which the Emirates Securities and Commodities Authority (SCA) can choose to suspend a company's shares from trading.

Making matters worse, Aabar Investments, which is majority-owned by the Abu Dhabi Government, said on Monday it would hold a board meeting tomorrow to decide whether it wanted to delist its shares from the capital's bourse. Shailesh Dash, the chief executive and founder of Al Masah Capital in Dubai, called the events "a double blow for investors". Of the Aabar announcement, he added that "if the government doesn't have confidence in the market, then who has? It just shakes up confidence."

Some observers were hopeful that after narrowly missing the MSCI upgrade to emerging market status last year, the UAE would make the cut this year. Fadi al Said, a senior fund manager at ING Investment Management in Dubai, said a status upgrade would have been "a game changer" in terms of adding much-needed liquidity. The MSCI report was not all negative. It noted that the UAE would be considered again next year.

"They are saying 'a lot has happened in the right direction but we don't think you are quite there'," said Mohammed al Hashemi, the head of asset management at Invest AD, a fund manager owned by the Abu Dhabi Investment Council. Mr al Hashemi said those frustrated by the lack of progress would be wise to consider the experience of the South East Asian countries that were flooded with hot money - highly speculative short-term investments - and became subject to market manipulation because they did not have the proper procedures in place when foreign investors arrived en masse.

"It is important to do it at the right time and with the right structure rather than doing something in haste that the participants will regret down the road," he said. Still, it was hard not to detect a tone of impatience in the MSCI report. It noted that SCA had pledged to make the necessary changes "some time ago" and added that investors would "welcome a public road map from the regulator and the exchanges providing visibility on the timetable of implementation of these changes".

SCA officials said yesterday they could not comment on the report. However, the agency did issue a statement regarding the stocks that were currently trading below 40 fils, indicating that for the time being it had no plans to delist the shares. "The regulation is in place for assuming normal market conditions. They cannot be implemented currently in the aftermath of the financial crisis which resulted in severe decrease in all stocks as they dropped to very low levels," said Maryam al Suwaidi, the deputy chief executive of the regulator. She said the companies"still are doing well by all standards" and that the share prices did not reflect their underlying financial condition.

While the MSCI is considered the most influential index provider, it is not the only one. Last year, the FTSE, which is the largest index provider outside North America, classified the UAE as a "secondary emerging market" and selected a basket of 13 stocks that will be on the radars of global fund managers when they are officially included in the FTSE Global Equities Index Series. A FTSE official said there were no plans to re-evaluate the classification of the market as a whole.

"There is a quarterly review, and we will use the June review for UAE stocks to be included in September. We might see inclusion or exclusion of one or two names from the original list," said Jonathan Cooper, the FTSE regional managing director. Any effect from the FTSE classification will not be felt until September, and analysts said the low trading volumes of recent weeks were likely to continue until then.