The Dubai International Finance Exchange sent shockwaves around the financial world when it announced an audacious link-up with the Nasdaq exchange earlier this year.
This complex deal aims to propel Dubai into the financial big league, but with liquidity continuing to be an issue on the fledgling exchange, what must happen to make 2008 the year of the DIFX?
“The first step has already been taken,” said Abdul Kadir Hussain, head of Mashreq Capital. “The DIFX has talked for a long time about attracting an anchor-listing and in DP World it has found one.
“It’s a listing that will continue to attract investor interest and shows the DIFX works, although there have been some teething problems, particularly concerning retail investors from the UAE.”
DP World, which debuted on the DIFX in late November, was the Middle East’s largest initial public offering as retail and institutional investors paid almost $5 billion (Dh18.36bn) to acquire a combined 23 per cent of the ports operator. It was the first primary listing on the DIFX, with its 12 other equities all secondary listings. “DP World will kick off trading – retail investors are now set up to trade on the exchange,” said Walid Shihabi, Shuaa Capital head of research.
Liquidity and listings
“The DIFX needs to attract more companies to achieve critical mass,” said Zahed Chowdhury, Deutsche Bank head of research. These should be single listings of companies with a market capitalisation of at least $5bn, Chowdhury said.
He said: “It’s not so much about the type of firms that are listing, but their size. The free-float must enable secondary trading activity so that investors can take positions. It doesn’t matter how large a company is if trading is thin, we should be looking at daily trading volumes of at least $10 million (Dh36.7m).”
Opinions differ over what is the best way forward for the DIFX – should it target further big ticket companies from the UAE or is internationalising the exchange more important? And does it matter whether listings are single, primary or secondary?
“The DIFX has always promoted itself as a regional exchange, but it needs a firm base of local companies that can be supplemented by foreign listings,” said Shuaa’s Shihabi.
Meanwhile, Deutsche’s Chowdhury and Mashreq’s Hussain warn of the dangers of attracting too many secondary listings. Chowdhury said: “We don’t want an exchange that defines itself through a series of secondary listings. That won’t galvanise the DIFX.”
Hussain also advocates taking a regional approach to avoid the DIFX being perceived as just another national stock exchange. A whole series of DP World-type listings are not necessary. “What the DIFX needs beside anchor listings are solid regional companies to float. So far, apart from DP World and Kingdom Hotels, the DIFX has only attracted co-listings from the likes of Australian and Canadian mining companies and these are never going to make the market.”
Hussain claims major listings from GCC, Middle East or South Asia should be the next target for the DIFX. He said: “A Pakistani bank or Indian corporate would be excellent – it doesn’t have to be a Nakheel.
“The DIFX should really be targeting a good flow of primary listings from the region and beyond. There’s a danger if the major listings are Dubai-centric, the DIFX will become boxed in as a Dubai exchange, rather than a regional or global player.”
The DIFX will be the principle platform for a succession of government privatisations in 2008 and beyond, Shuaa’s Shihabi said. “These will support the increasing number of private companies listing on the DIFX that find floating on the local domestic markets excessively cumbersome,” he said.
The Nasdaq effect
Borse Dubai expects to complete its Nasdaq tie-up by February. This will see the DIFX renamed the Nasdaq-DIFX, giving Dubai access to its US partner’s technology, expertise and branding. “The Nasdaq deal is a win-win situation, but exchanges are all about strong companies and high volumes, so that’s what the DIFX must focus on,” said Mashreq’s Hussain. The link-up followed a six-week battle between Nasdaq and Borse Dubai for ownership of the OMX Nordic Exchange, which includes seven stock markets in Scandinavia and Northern Europe. From rivals to collaborators was just one short step for Borse Dubai Chairman Essa Kazim and Nasdaq Chief Executive Robert Greifeld.
The Nasdaq exchange and Nasdaq-DIFX will be a linked trading platform, enabling investors to trade on either market. Chowdhury said existing agreements already allow European investors to trade on the DIFX, while US institutions can also access it through their European interests. “The Nasdaq is globally renowned and the DIFX isn’t, so it will be an easier pitch to sell the DIFX around the world with Nasdaq branding.”
The Nasdaq-Borse Dubai alliance has been billed as the beginning of a truly global exchange platform bridging North America, Europe and the Middle East and but questions remains over how Dubai’s LSE stake will fit into the jigsaw. The Nasdaq-DIFX rebranding will enable the exchange to piggyback onto Nasdaq’s global credibility, Shuaa’s Shihabi said.
“The Nasdaq and OMX merger will be the most significant component. The deal should increase interest in the DIFX, but let’s see how it pans out,” he said.
Making the market
Market makers are likely to be a new phenomenon for retail investors in the UAE. They are brokers contracted to particular listed companies to drive liquidity in their shares. They “make the market” by promising to fulfil all buy and sell orders for the stocks they are assigned to.
“Market makers are on the ground and have been working on DP World, but their work will not be significant until there are more actively traded stocks,” said Shihabi.
Market makers encourage liquidity because of narrow spreads between buy and sell prices and must ensure active trading in their clients’ shares.
“They provide prices for any stocks at any time and will create liquidity,” said Deutsche’s Chowdhury, who said developing market makers will be key to the DIFX realising its ambitions.
To be successful, a stock market requires investors, intermediaries and investment options, he said. “The DIFX has the first two and is now seeking the third. It must broaden its product range to increase the breadth of investment opportunities. There must be more options of what to buy and sell.
“If that happens it’s almost the last piece of the jigsaw, together with transparency, effective regulations and policing of these regulations. It will be vital to increase the number of listings and deepen the market by having a bigger range of products that can be traded on any given company, from trading the underlying stock to put and call options and so on.”
Mashreq’s Hussain would also welcome the DIFX moving into Global Depository Receipts, or GDRs. These are bank certificates issued in more than one country for shares in a foreign company. These are traded like domestic shares, but are offered for sale globally through the various bank branches.
Trading on the DIFX will be a whole new ball game for investors, analysts warn. “From a retail perspective, investors need to understand the difference between a book-building initial public offering and domestic floatations of the past,” said Hussain. “Buying a stock on the DIFX is a quality long-term investment. It’s not something where you want to maximise leverage and try to make a quick profit, which is the prevalent mentality in the region at the moment,” he added.
The DIFX so far
The DIFX is not just about listed equities and it is keen to develop a swathe of fixed-income products such as sovereign, corporate and supranational bonds, convertible notes, Eurobonds and a wide range of notes. The latter are debt securities, usually maturing over one to 10 years.
As it grows, the exchange plans to introduce other securities such as derivatives and exchange-traded funds, many of which do not currently exist in the region.
The DIFX claims to be the largest sukuk market in the world. While the DFM and ADSM offer simple trading of shares, DIFX investors can diversify their risk through investment funds, unit trusts, exchange-traded funds and real estate investment trusts or Reits.
Nasdaq deal a win-win for DIFX