UAE gets 'Emerging Market' status

In a move that is bound to take international sit up and take notice of some of the larger and most efficiently managed companies here in the region, global index developer MSCI said late last night that it has decided to upgrade both the UAE as well as the Qatari stock indices to an Emerging Markets status from May next year.

“The reclassifications of the MSCI Qatar and MSCI UAE Indices will coincide with the May 2014 semi‐annual index review,” the index developer said in a statement.

With this new classification, shares in the UAE and Qatar together are expected to attract about 1 per cent of total global investments in the emerging markets space, which will work out to about $400 million worth of potential foreign investments in the countries’ share markets, with the UAE expected to be a bigger beneficiary than Qatar.

MSCI currently has a UAE Country Index as well a Qatar Country Index. In the UAE Index, the developer includes stocks such as Emaar Properties, DP World, ADCB and NBAD although it is not clear yet whether all of these shares will be included in the Emerging Market index.

Nevertheless, analysts expect sentiment on local bourses to be positive, with some shares expected to see more than usual interest due to the upgrade announcement.

Both markets are currently classified a tier lower as Frontier Markets, and had in the past two occasions failed to make it for the upgrade due to the nascent levels of market maturity.

However, in recognition of the steps taken by the UAE’s market regulator Esca as well as the Qatari Exchange over the past years, the MSCI decided to yesterday upgrade both markets.

Dubai Financial Market (DFM) was quick to welcome the upgrade and said the development was “overdue” in light of the various initiatives that the UAE bourses had been implementing.

“This development is overdue in light of the market infrastructure improvements made and ticking of all upgrade requirements long time ago,” said Essa Kazim, Managing Director and CEO, DFM.

“This significant step evidently demonstrates international institutions’ recognition of DFM’s pivotal role over the last three years to further enhance the UAE market infrastructure in collaboration with the Securities and Commodities Authority of UAE (SCA),” he said.

Kazim highlighted some of the steps taken by the DFM in conjunction with the SCA which made this upgrade possible. “DFM spared no effort and has taken numerous initiatives to lay out the necessary frameworks for various development steps including the implementation of the ‘Delivery versus Payment’ (DvP) mechanism since 2011 as well as the implementation of a Buyer Cash Compensation feature last May,” he said.

“Additionally, we have been actively engaged in productive discussions with various market participants including custodians and institutional investors via a series of meetings held in the global financial centers. The aim of these meetings was not only to explain measures taken but also to listen to their remarks and feedback on further initiatives to follow,” Kazim added. 

“We are delighted to see the UAE market upgraded to “Emerging Markets” status, which reflects international investors’ confidence in our markets and their satisfaction with what we have accomplished. The reignited interest of local and foreign investors towards DFM since the beginning of the year underlines that what we have implemented caters to investors’ expectations and the attractiveness of UAE market to foreign investments.” Kazim said.

“DFM reiterates its commitment to ensure that market infrastructure meets international best practice recommendations. We will be implementing securities lending and borrowing together with market making once we have completed the necessary regulatory process.  This will further increase the UAE’s attractiveness for foreign investments thereby placing our market in the position amongst international markets”, Kazim concluded.

A media statement by the Dubai exchange noted that DFM is amongst the best performing exchanges globally since the beginning of the year with its market index up by almost 50 per cent to rank amongst the best performing exchanges while the average daily trading value increased 67 per cent to Dh460 million compared to Dh278.2 million in the corresponding period of 2012.

“International institutional investors recognised the improvements made by the Emirati regulator (Security and Commodities Authority), the Dubai Financial Market and the Abu Dhabi Securities Exchange with respect to the Delivery Versus Payment (DVP) model. A proper false trade mechanism was introduced in May 2013 on both exchanges. A regulation governing stock borrowing and lending agreements has also been issued and the implementation is expected to be effective in the coming months,” the MSCI noted in the statement.

“The majority of market participants have expressed no major concerns over the safekeeping of investors’ assets and are starting to move away from the dual account structure,” it said.

The index developer also took note of the positive developments in Qatar. “Market participants recognised that the Qatari authorities and the Qatar Exchange have made significant progress in enhancing the operational efficiency of the DVP model. Many international investors welcomed the introduction of a proper false trade mechanism that includes securities borrowing and lending facilities and expressed improved confidence in the safeguarding of investors’ assets. Consequently, a number of international institutional investors have also started to migrate from the current dual‐account structure to a single‐account structure,” it noted.

“MSCI welcomes the progress made to date and the further commitment of the Qatari authorities to increase the Foreign Ownership Limit (FOL) levels applied by Qatari companies. Several companies have requested the Qatar Exchange to modify the calculation method of their FOL to use the companies’ total market capitalization instead of the free float market capitalization, which will effectively increase the shares available to foreign investors. While the current level of foreign ownership is well below the limit, foreign ownership limits in Qatar remain low by Emerging Market standards and the Qatari authorities should actively continue to increase them above 25 per cent in order to mitigate potential issues arising from increasing foreign capital inflows,” it said.

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