UAE brokerages under threat as volumes fall further

Traded value in Abu Dhabi, above, stood at Dh57m in January, reached a peak of Dh284m in March and has since dropped to an average of Dh25m. Galen Clarke / The National

Stockbrokers in the UAE fear many more securities firms are likely to close their doors in the second half of the year as trading volumes return to pre-rally levels.

"Everyone is really scared," said Ahmed Dibajeh, a broker at Investor Financial Brokerage in Abu Dhabi. "The situation is very bad because there isn't enough investor money to go around and because of the continued pressure on the financial situation of many of the brokerage companies."

First-quarter trading activity surged from a low of Dh62 million (US$16.8m) a day in January to a peak of Dh981m in March as sentiment and investor appetite for riskier asset classes improved, causing many brokerages to postpone plans to shut down.

But volumes in the second quarter reversed to an average of Dh80m a day. Traded value in Abu Dhabi stood at Dh57m in January, reached a peak of Dh284m in March and has since dropped to an average of Dh25m.

With the low trading summer season and Ramadan imminent, most brokers are bracing for worse to come.

As too many companies all fight for a diminishing piece of the pie, industry insiders expect as many as 20 companies could shut down by the end of the year. There are currently 50 firms in operation, down from 110 two years ago.

Shareholders of brokerages are losing patience over a market that has continued in a downward spiral, preferring to put their money elsewhere, said Khaldoun Jaradat, a trading manager at Brokerage House Securities in Abu Dhabi.

"In our industry, the expenses are higher than the income," Mr Jaradat said. "A brokerage owner, be it a wealthy individual, can be patient and say, 'In one or two years, the market will pick up and I want to be there'. But we are talking about 2009, 2010, 2011 and 2012 and there is no sign of revival."

Many of these companies were set up by family offices in the boom years of 2005 to 2008, with investors preferring to preserve the trading commissions on their investments rather than pay them to another company.

As foreign investors flooded the markets, these shops expanded their services, took out loans to offer leverage to clients to benefit from the popularity of trading in property stocks.

During that period, Mr Jaradat said, his company had two trading floors, one for men and one for women. "We made a market in our offices," he said.

"We used to bring additional chairs from outside to keep up with the steady flow of customers because our sofas would only fit about 20 people. But nowadays no one walks in. Only God knows where the stock market is going to go."

Many companies are still reeling from lawsuits and carrying bad loans from when stocks plummeted, while at the same time bringing their commission fees lower to keep investors still willing to trade on the country's exchanges, the Abu Dhabi Securities Exchange and Dubai Financial Market.

Exacerbating the problems for a stagnating industry, a number of UAE companies shunned local markets and opted for listings in London.

In June last year, DP World sought a secondary listing on the London Stock Exchange. In March, NMC Healthcare offered shares in the company to raise $250m and has since gained FTSE 250 inclusion. In January, Abu Dhabi Capital Management, an alternative investment firm, listed one of its funds on London's Alternative Investment Market.

"Companies will think twice before listing in illiquid markets like the UAE if the environment stays the same and opt for initial public offerings in London, Hong Kong and Singapore, which are much more credible and regulated markets," Jassim Alseddiqi, the chief executive of Abu Dhabi Capital Management, said at the time.

"There is fear that more listings from UAE companies in London will take away liquidity," said Ibukun Adebayo, the head of primary markets for South Asia, the Middle East and Africa, at the London Stock Exchange.

"Local markets will develop when they start to attract foreign capital flows. For those to come back, companies need to be listed abroad, have the right corporate governance and standards in place, attracting the long-term institutional investors, so when they get a secondary listing in the local exchanges, they will bring that and more liquidity with them."

Meanwhile, Mustafa Omar, the finance manager at Vision Capital Brokerage in Abu Dhabi, said the near-term outlook appeared grim for the local industry.

"You can see what's happening, the volatility in the international markets, clients are not interested in investing," he said.

"We are entering the summer, where everyone is on holiday, we are in preparation of market stagnation."