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Repeat MSCI snub shows investor apathy for Gulf
Liquidity and lack of short-selling were reasons for MSCI's decision to keep the UAE as a frontier market. And MSCI sees little time for the country to implement reforms before next review.
December 18, 2011 3:58 by Reuters
Index compiler MSCI’s latest snub to the United Arab Emirates and Qatar underlines the need for the Gulf neighbours to push through reforms, but problems plaguing UAE stocks run deep and investor apathy is a big worry.
On Wednesday, MSCI kept the two energy exporters as frontier markets, the third time it has opted not to give them emerging market status. They will be reviewed again in June 2012.
MSCI urged the UAE to introduce new regulations to allow securities borrowing and short-selling and repeated a plea to Qatar to raise foreign ownership limits from 25 percent.
“Securities borrowing will help solve the consequences of failed trades and so may end up solving the main problem international investors have, which is that in certain conditions their holdings may be sold without their consent,” Remy Briand, global head of index research at MSCI, told a conference call for reporters on Thursday.
“There must be time not only to implement the regulation, market participants need to be able to test it and there’s not a lot of time between now and June.”
Dubai shares fell in response to the decision, taking their losses to about 17 percent this year.
Yet the stocks were already languishing near 7-year lows, showing investors are concerned about other issues such as a lack of diversification and a degree of opacity that is especially difficult to accept when returns are meagre.
“Probably the biggest factor for MSCI clients is the shortage of liquidity on UAE markets,” said Jeff Singer, chief executive of Nasdaq Dubai, one of three bourses in the UAE.
MSCI’s Briand warned that the slump in trade was a worry.
“At this stage we haven’t highlighted liquidity as an issue that would prevent a migration, but it’s something that will be reviewed as part of the next cycle, as will the other criteria, which will include the depth of the market.”
Turnover on the Dubai Financial Market, Nasdaq Dubai’s sister bourse, is about a tenth of that of 2008, while the Dubai index is down 78 percent from a 2008 peak.
These declines stem from a real estate crash that sent stocks on the property-dominated bourse tumbling and the sector remains mired in a savage correction.
This has obscured a wider UAE economic recovery, with gross domestic product forecast to grow 3.8 percent in 2011 and 2012.
“The UAE stock markets are not deep enough to reflect the economy — if there had been a wider variety of listings, the market declines of the past few years would have been smaller,” said Jassim Alseddiqi, chief executive of Abu Dhabi Capital Management. “Apart from Dana Gas, energy is not represented, and nor is tourism.
“Banks have done very well since 2002, even with the financial crisis, but bank stocks are not very liquid.”
Foreign institutions are also worried about the treatment of minority investors, with trading in mortgage provider Amlak suspended since 2008 and the abrupt delisting of Aabar Investments another worrying precedent.
“It’s a myth that investors have short memories — unless there’s a compelling investment story, they find it difficult to forgive past transgressions,” said a Dubai-based fund manager who asked not be identified.
Qatar, the world’s richest country per capita, should be of interest to foreign investors. Its stock market is in the black for the year, a rarity in itself.
“The UAE would be failing (to be upgraded) because of a lack of interest, whereas Qatar’s fundamental story is more straight-forward and believable,” said Ibrahim Masood, senior investment officer at Mashreq Bank in Dubai.
But daily trades on the Qatari index rarely top 10 million shares, making it difficult to…(CONTINUED TO NEXT PAGE)
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