Are Arab stock markets ready for an upgrade?

THIS summer, stock market index compiler MSCI could upgrade the status of stock markets in the UAE and Qatar – a move that could help reinvigorate lackluster trading activity.

At the end of 2011, MSCI said it would keep the MSCI Qatar and MSCI UAE indices on review for potential reclassification from frontier market to emerging market status for another six months.

It had already postponed a decision in June last year, saying at the time that it needed more time to study whether both countries merit promotion.

With an upgrade still on the cards, cashy looks at what it would mean for investors here...

Playing in another league

If a ‘frontier market’ is the economy class in the world of stock market indices, then ‘emerging market’ status is akin to an upgrade to business class.

MSCI regards 25 countries as frontier markets because their stock markets are still in the early stage of development. These also include Serbia, Vietnam, Bangladesh, Jordan and Sri Lanka.

Although Dubai’s economy is larger than many other frontier markets, the Dubai Financial Market (DFM) was founded 10 years ago and is among the younger markets in the world.

At present, there are 21 stock market indices regarded as emerging markets, including China, Egypt, Korea and Turkey.

Tough times

Investors reacted negatively to the MSCI decisions to postpone an upgrade, and the DFM general index ended 2011 down 17%. Since its pre-crisis peak, the index has lost three-quarters of its value.

Investors in both the Arab Gulf stock markets were looking for an MSCI upgrade amid hopes it would trigger increased foreign fund inflows and revitalise the markets' fortunes.

Trading volumes have been plummeting, and 30 UAE brokerages houses had to shut down. In October, even HSBC Middle East Securities closed down its brokerage for retail investors due to a lack of turnover.

Optimism abounds

Stringent foreign ownership limits were seen as a potential deal breaker for an upgrade, but things could be looking up.

“The UAE is on the way to liberalise the commercial law so that foreigners can own more than 49% of UAE listed company,” Houssam Tourani, a partner at Dubai-based law firm Al Tamimi & Company told cashy. “Such major changes in laws can take time, but I am quite optimistic for 2012.”

MSCI also wants to give market participants more time to see if a new delivery-versus-payment (DVP) system, implemented in mid-2011, works correctly. DVP aims to guarantee that investors receive proceeds from stock trading under all market circumstances.

So could an upgrade help to drag the UAE stock market out of its slump?

The market capitalisation of all MSCI frontier markets stands at $5 billion, while emerging market are collectively worth a whopping $4 trillion. An upgrade could attract new investors to the region, with increased fund inflows leading to a stock market rally.

It seems investors are optimistic, too. In January 2012, the DFM general index was up 6%. As the old traders’ adage goes: “As January goes, so goes the year.” Let’s hope so!

Pic credit: jscreationzs/ FreeDigitalPhotos.net

Are you optimistic of an upgrade? What do you think the impact would be?