UAE, Qatar flunk MSCI upgrade test

Index provider MSCI on Wednesday maintained the UAE and Qatar as frontier markets, once again delaying a much-awaited promotion of the Gulf states to emerging markets status.

Both countries remain up for a possible upgrade in June 2012, as part of MSCI’s annual market classification review, the company said in a statement posted on its website.

A promotion to emerging markets status could provide a boost to stocks in the UAE and Qatar by attracting a large pool of investors who track the company's benchmark equity indexes.

The delay, although not good news, may still prove to have limited market impact as many investors expected MSCI to hold off the promotion as markets deteriorate.

“Low liquidity may have made MSCI delay its decision to its annual review next June – that’s the diplomatic option,” said Mohammed Yasin, chief investment officer with CAPM Investment in Abu Dhabi.

“Market conditions are less favourable than they were six months ago – UAE liquidity has dropped sharply,” he added.

Dubai's benchmark stock index is down 78 per cent from a 2008 peak as the emirate’s real estate crash weighed on equity valuations on the property-led bourse. Turnover in that market fell to a seven-year low this year, or about a tenth of what it was in 2008.

In the long run, however, the delay will have negative repercussions to stock markets in the Gulf region, said Ibrahim Masood, senior investment officer at Mashreq Bank in Dubai.

“We don’t have a great performer in the region to remind emerging market investors that this is a part of the world they should look at,” Masood said.

MSCI had already denied a promotion to the UAE and Qatar at its reviews in 2009 and 2010. It was expected to make a decision in June this year but postponed it to Dec. 14, partly to allow market players more time to assess new delivery-versus-payment settlement systems, or DvP, which some of the bourses introduced in 2011.

The UAE received “very positive” investor feedback since the implementation of the new DvP model, but investors were concerned about the effectiveness of the new system under particular circumstances, MSCI said.

“This is in particular the case for failed trades where a forced sale of assets, without the owner’s consent, remains a possibility,” the index provider said.

Those concerns have caused many investors to adopt dual-account structures in the UAE, MSCI said, adding that the issue could be solved with the introduction of new regulations allowing for securities borrowing and lending agreements, as well as for security short selling.

As for Qatar, stringent limits to foreign ownership of stocks, including those of large companies, remain the major stumbling block, MSCI said, repeating a warning made in previous reviews.

“Any change to the status of the MSCI Qatar Index is conditional upon a meaningful increase of foreign ownership limit levels applied to Qatari companies,” MSCI said.

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