The Dubai International Financial Exchange (DIFX) will list its first United States-based company this week, paving the way for a series of similar public offerings set to come on board from the North American markets.
According to Dubai’s Daman Investments, lead manager of the initial public offering of Buffalo-based Nanodynamics, the move will go some way to cement the emirate’s place as a global exchange.
Shehab Gargash founded Daman (now Daman Investments) in 2001 and serves as Chief Executive Officer of the Dubai-based private joint stock company.
His company is capitalised at Dh200 million and is a privately held, non-bank financial services group focused on developing capital market opportunities within the UAE and the Middle East.
During his 12 years in the UAE banking industry, Gargash’s previous roles have been in marketing, distribution, trade finance and investment banking, first with Citibank, from 1989 to 1993 and later with the Emirates Bank Group (1993 to 2001).
With an MBA from the George Washington University in the United States, Gargash (pictured above) is also a founding board member of Young Arab Leaders and the Arabian Real Estate Investment Trust, and was appointed to the Dubai Chamber board of directors last March. He is a frequent public speaker and is well known for his popular daily column – now in its 10th year – in the Arabic newspaper Al Ittihad.
Gargash discussed with Emirates Business the regulatory hurdles facing regional stock markets, concerns over fair equity research and valuations, and monitoring front-running.
He gave his forecasts for the regional stock markets this year, and talked about the challenges that could slow down the rise in foreign investment in the UAE.
Gargash also warned the region’s asset managers to have “a sharper knowledge” of events happening beyond their borders, as the correlation gets closer between local and global markets.
What does the listing of the first US firm on the DIFX, announced last week, mean for the exchange?
I think it’s very significant because it’s exactly the reason an exchange such as the DIFX was set up. It was established to attract quality listings from around the world and to create a marketplace for people to be able to trade those securities.
Having a US company come in on the bourse is a fulfillment of that promise. I think it has put the DIFX on the road to a global-quality exchange.
What is the significance of an alternative energy and clean technology company listing on the DIFX and do you see this sector becoming an industry that will see gains in 2008?
Yes, with increased worries about environmental issues – and about the economic logic behind environmental matters – clean technology is becoming an area of increased importance for corporations.
Nanodynamics is a pioneer at utilising nano technology advances that enable companies to have more potent solutions, which are more cost-effective and very friendly for the environment.
Any other companies you are talking to for the UAE or regional stock markets?
We will give more details later but Nanodynamics is one of a chain of similar IPOs we are working to bring into the DIFX from the US markets.
All of them will be very nice IPO stories – very good management behind good business models. We are very selective in picking those companies we believe will be successful and those that show an ability or potential for continued success.
What do you think are the reasons behind the slowdown of the flow of initial public offerings?
I don’t think initial public offerings have been slow, I think they are a function of demand and we have just exited two years of a negative period in our stock markets. So by definition you are going to have fewer IPOs than usual.
But we have not seen them stop and that’s very important. We had some very important local IPOs over the past year and going forward into this year it looks very promising. So I think the IPO flow will be more robust going forward because the markets have sort of picked up now.
At the DIFX specifically we have seen a very successful IPO with Dubai Ports World. This one [IPO of Nanodynamics] hopefully is running very nicely and indications are good for the first US initial public offering on the DIFX.
And 2008 promises to be a very positive year for in terms of getting more companies on board and more activity through the exchange.
In the first half of 2007, foreign investor buying volume on the Dubai Financial Market tripled and foreign investors accounted for about 30 per cent of the total DFM trading, it was reported. It then retreated. Where do you think this figure will stand for the first half of 2008?
I think foreign institutional investors have discovered the UAE markets, both local markets and regional, such as the DIFX. They have discovered the Gulf is a very promising emerging market. The risk-reward proposition makes a lot of sense to them. So I expect to see more participation from them in local and daily activity here.
That will increase the volatility from one side but it will certainly increase the amount of traffic and volume we will see through our local exchanges on a daily basis.
What are other possible hurdles impeding the rise in foreign investment in the UAE?
The foreign investors are going to bring their own processes and logic to the market so we’re going to see a quantum shift in the way the market transacts.
We’ve seen that, if you compare today and five years ago, there is a big difference in that as well. But I think going forward we are going to see a more rigid interpretation of things like profitabilities, of reading the results of the companies, in daily trading volumes, in triggering stops, in short-selling eventually and in margin trading.
All of those will be new concepts coming into our market as it becomes a closer market, a closer reflection of what an international market looks like.
What is your 2008 forecast for regional stock markets?
I think it is a very significant shift we are seeing. We are seeing a natural shift, there is closer correlation than previously between what is happening locally and globally, and I think that’s why it’s very evident in the quick dip and pick up that we saw last week or the week before on the local exchanges.
Approximately 30 per cent of the daily volume is from foreign institutional investors on the DFM. That itself is a telltale sign that the correlation is going to increase and not decrease going forward.
So asset managers in the region today have to have a sharper eye and a sharper knowledge of what happens beyond their borders.
They could get away without that knowledge in the past but not anymore. For 2007, I remember I said 10 to 15 per cent from 2006 and I was proven wrong because until October we were negative. But then we jumped up about 30 per cent so I think quarter four made up for our expectations and exceeded it.
This year I will be anxious because of the volatility of the international markets, which was not as big a factor a few months ago as it is today.
Also, with oil price high it makes things a little more uncertain. I wouldn’t venture a guess but I would be very comfortable that 2008 will be a positive year and will be based on the results we are seeing in terms of the fourth quarter earnings from 2007 and going very early on into 2008.
I think the growth will remain healthy for the companies. Also, we can’t forget a new factor in 2008, which is the listing of private companies.
We have a whole batch of two-year-old companies on the local markets that are going to be listed. For instance Al Qudra announced it would list this year.
So you’ve got several of the similarly aged, two-year-old companies that are due for listing and will create a whole new cycle of momentum, at least on the speculative side that will be positive for the stock market indices.
So I will not give a number this time but I think 2008 will be a positive year and I think it’s going to be interesting. It won’t be for the faint-hearted because I think it’s going to be a roller coaster in terms of the dealings with short-term volatilities.
What do you think are some of the regulatory challenges facing the stock markets here?
I think the main thing is to successfully regulate the shift from a small, fairly quiet local market into the next emerging market.
You have to put in place proper guidance and enforce proper regulations to enable you to successfully do that so you don’t have a chaotic situation.
What do you think about the Securities and Commodities Authority’s recent concerns about equity research and the way some analysts are reaching their valuations? Do you think this type of research should be regulated?
I think the SCA has a reason to worry because while some research we see out there is very good, some other leaves a lot to be desired.
I think it will be important that we don’t put in place too many guidelines that stifle research, which get researchers worried about what they say so they end up saying nothing.
Because I think research is an important component of the environment and it gives good guidance to the investors in making their final investment decisions.
Do you think the SCA should monitor front-running?
The SCA needs to put in place a lot more practical and convenient guidelines for investors in general. It has done a lot since it was set up, but there is a lot more to do. I think it is on the right track.
How do you deal with front-running at Daman?
We comply [laughs]. We are regulated by the SCA or by the Central Bank, and by the Dubai Financial Services Authority. So we are regulated in three environments depending on which business it is.
We are in constant and very constructive discussions with the regulators because it’s very important for the regulators to also positively interact with the companies in the market to come up with an environment that is protected from one side, but that is also conducive to business.
How do you ensure that your brokerage research that is provided to clients is not mixed with the buy side?
We do not publish our research; it is done for our internal purposes now. In the future we will be publishing research but for now we do not have published research.
Daman: IPO flow will be more robust