New DFM rules may spur volatility: Analysts

The recent announcement by Dubai Financial Market (DFM) to introduce a unified fluctuation band for listed securities could trigger more volatility in the market, analysts have warned.

On Sunday, DFM announced it would introduce a unified fluctuation band for all listed securities within one trading session based on 15 per cent up and 10 per cent down, as of January 2, 2011. Additionally, the exchange also announced that it would adopt modified rules for the DFM General Index (DFMGI) to further reflect the highly traded stocks and accurately mirror the market activity.

Based on the new modifications, DFM-listed securities will be grouped in one category and traded under a unified fluctuation band, contrary to the split between active and non-active. The current fluctuation band is 15 per cent up and 10 per cent down for active stocks and 5 per cent up and down for non-active stocks.

"This is certainly an attempt to induce more liquidity. Like all other GCC markets, the liquidity for DFM hit an all-time low during 2010 and hence this measure is a desperate attempt to revive liquidity. However, my concern is that allowing wider band for non-active stocks may actually spike volatility thereby feeding speculation," MR Raghu, Senior Vice President - Research, Kuwait Financial Centre (Markaz), told Emirates 24|7.

"The band for non-active stocks earlier was a narrow one (5 per cent) and by unifying with active stocks all you are doing is to increase that band for non-active stocks. More band gives more price movement opportunity which means more volatility in the stock price movement," he added.

DFM also announced that the maximum weight of a single stock in the index would be decreased from 25 per cent currently to 20 per cent, aimed to limit the reflection of high market capitalization stocks on the index and balance the effect amongst different stocks.

However, experts believe although these measures would encourage stocks with lesser weight on the index to have a broader representation, they may not necessarily improve liquidity in the market in the short term.

"Reducing the maximum weight of a single security from 25 per cent to 20 per cent would definitely improve the market structure in the long term as it would facilitate a broader representation of securities with lesser weight in the index. It would also minimise the impact by specific stock or stocks on the overall index," said Fadi Al Said, Senior Investment Manager & Head of MENA Equities, ING Investment Management, Middle East.

"There are a number of listed stocks having lesser weight in the index, but that have outperformed the DFM benchmark index year to date. Therefore, by putting a cap on the maximum weight of a single security from 25 per cent to 20 per cent, lesser-weighted stocks might see increased volume and can have a greater impact on the index movement, thereby broadening the depth and diversity of the index," he added.

Having said that, these measures may not necessarily improve liquidity in the short term, which is an equally important requirement in the market at the moment, he maintained.

He said two crucial things need to happen in order to increase liquidity in the market. One is the inclusion of UAE in the MSCI Emerging Market index. The second one is to have a broader market base in terms of sectoral representation in the DFM general index. Currently, DFM is primarily dominated by two sectors -- real estate and finance, which are going through the downturn phase, and investors have low appetite for these sectors.

The DFMGI is based on the total market capitalization adjusted by the free float. The weight of any company represented in the index is decided according to the number of free float shares with the exclusion of the government ownership and major stockholdings that are 5 per cent and above.

Some of the stocks having maximum weight on the index include Emaar (20 per cent), DIB (12.61 per cent), Emirates NBD (6.79 per cent), Du (6.65 per cent), Aramex (6.42 per cent), DFM (6.28 per cent), among others.

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