?The current economic slowdown has brought home to the UAE non-Arab investments in the stock markets which are essential and beneficial for the economy.
Before the international financial crisis broke, there was a huge hue and cry over non-Arab investors being essentially "speculators" who were detrimental to the long-term interests of local investors. There were persistent calls to curb their activities with stricter anti-speculation measures. However, the same people who were supposedly apprehensive about foreign investors are now laying the red carpet on their return.
The Securities and Commodities Authority (SCA), the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM) and UAE national and Arab investors have called upon non-Arab investors to inject more capital into UAE stock markets since their return to the bourses in April. Though the country's stock exchanges have fallen over the past few days, there have been no accusative fingers pointed against non-Arab investors as the perpetrators of this retreat.
Such accusations would have been common at the same time last year during periods of sharp falls on the bourses, when foreign investments were considered hot money, intended only for speculative purposes and quick profit. No one is asking anymore for the Ministry of Economy, the UAE Central Bank, the SCA, ADX and the DFM to introduce regulations and restrictions on non-Arab investors.
There is general agreement today that non-Arab investments in UAE stock exchanges play a positive role, push the markets forward, improve liquidity levels and increase the numbers of investors. Foreign investors, especially institutional ones, are also seen as more mature and capable, often making profits even when the markets fall.
Local investors, on the other hand, are seen as inexperienced, pushed to liquefy their investment portfolios at unsuitable times whenever they are in a state of fear.
According to statistics available to Emirates Business from the index of Abu Dhabi- based Al Fajr Securities, total purchases of non-Arab investors – or entry – in the ADX and the DFM between October 2007 and June 2009 were Dh293.9 billion, while their sales – or exit – totalled Dh292.1bn. This means that net non-Arab investment, which is the difference between the total sales and total purchase, was Dh1.7bn in the positive.
Dr Humam Al Shamaa, economic consultant at Al Fajr Securities, said: "Non-Arab investment plays a positive role. Some 80 per cent of it is institutional, coming from banks and foreign financial firms. It is medium- and long-term investment that carries out buying and selling transactions, as well as speculations. Its strategy is not aimed at a final, permanent exit from the market; rather it enters and exits the market according to the prevailing investment opportunities with a view to maximising profits.
"We should not be judgemental about non-Arab investors during this period of an international financial crisis. As a result of the crisis, a lot of their money exited not only from the UAE and GCC markets, but also from all other emerging markets, such as India, China and South East Asian counties."
He said non-Arab investors exited the UAE markets to provide their mother companies with liquidity. Cross-border loans among banks fell by $4.18 trillion (Dh15.3trn) to $31trn and this applied to all emerging markets. It happened after $3trn was withdrawn from emerging markets.
"There are factors that push non-Arab investors to continue in the UAE stock markets. The most prominent is the continued fall in prices of all listed shares. That pushes them, especially institutional investors, to buy shares in big chunks," said Al Shamaa.
"In addition, non-Arab investors have also realised that the sharp corrections seen in the UAE markets are almost at an end. The investment environment in the UAE is now ripe for the entry of non-Arab investors and they no longer sell their shares every time the markets fall. On the contrary, they maintain their holdings even while others sell.
"There is no evidence that non-Arab investors have harmed the market in the past or are doing so now. The entry and exit of non-Arab investors will continue. They have started to re-enter our markets from April when there were strong signs of a recovery from the crisis. I expect they will continue to enter the market for sometime now and that will be to the markets' benefit," he said.
"Their entry is still happening in a limited way compared to before the crisis. But they will increase their investments as the global economy improves, especially when unemployment rates stabilise, consumer prices rise and retail sales go up. Besides, the most important factor is the real estate sector and how soon it will see stability."
Al Shamaa called for a charter of ethics for foreign investors, which would be applicable on both the foreign portfolios and the SCA. It should not place restrictions on foreign investment but put in place safeguards for the UAE markets should they be subject to similar crises in the future.
Such a code should make it incumbent on investment funds, such as caution funds, to disclose their investment strategies and to be committed to what they disclose, he said.
Meanwhile, Ziyad Al Dabbas, Financial Consultant at the National Bank of Abu Dhabi, said foreign investment was not speculative in nature but professional, entering at the proper time when a certain company's shares are sold at their fair value.
Foreign investors entered the UAE stock markets in 2004 when Emaar Properties allowed foreigners to own its shares, which was a useful rather than harmful investment. It broadened the shareholder base and raised the level of liquidity through buying and selling operations.
"Foreign investors play a good role and we should not take their behaviour at the start of the financial crisis, when they exited the local market in droves, as a yardstick for their performance. UAE national, Gulf and other Arab investors, too, left the market at that time," Al Dabbas said.
He added that most foreign investment in the country's markets was corporate, with very good standards and ethics, and enough expertise and experience to guide it about when to enter the markets and when to exit.
"In the past, we have noticed the big role foreign investors have played in developing awareness – thanks to the accurate studies issued by them on the fair prices of shares of listed companies, profitability forecasts and the performance of the UAE economy."
Al Dabbas was against any restrictions on the entry and exit of foreign funds in the UAE's stock markets on principle, saying it was only a state of quid pro quo since Gulf investors, including UAE nationals, participate in many foreign markets where no restrictions are imposed on their activities.
"And, as long as we accept this, we have to apply the same principle in the UAE, considering that our economy is open to the whole world. Undoubtedly, inflow of foreign funds is a part of the world market where we live, and we have to accept and benefit from it, rather than restrict it."
Al Dabbas expected market participation by foreigners to go on increasing, as they have seen a glimmer of improvement in the global and UAE economies since April. Therefore, they have started to distribute their investments over several global markets, including the UAE's.
Major foreign investors and investment houses have research centres and specialists studying all markets carefully and, consequently, only when they were certain about risks receding in a certain market would they enter it once again, he said.
"We have to prepare an appropriate business climate for them and if there are any intentions to regulate foreign investment, we have to first study how other countries have approached it."
Rashid Al Baloushi, Deputy CEO of the ADX, said the bourse was not contemplating any regulations or restrictions on foreign investors. All statistical data issued by the bourse from time to time point to the positives of foreign investment. Non-Gulf foreign investments are increasing, and buying and selling by foreigners is growing in an encouraging manner, he said.
"The crisis and the ensuing exit by foreigners from the stock markets should not make us look at foreign investors with caution," Al Baloushi said.
He added that the current economic crisis was truly global, having hit all countries of the world, and investors almost everywhere withdrew their funds and investments. In the UAE, too, foreign investors pulled out of the markets and sought safe havens.
"I do not prefer any restrictions on foreigners, and recently there has been a big improvement in the entry of foreigners into the Abu Dhabi market, which is a positive indicator," he said.
Al Baloushi added that the Abu Dhabi market has managed to attract vast amounts of foreign investment in an indirect manner.
"Instead of thinking about regulations or restrictions on foreign investment we have to focus on the development of laws that protect all individuals, investors and financial institutions," he said.
Nazem Al Kudsi, CEO of Abu Dhabi Investment Company, also agreed that foreign investment was useful and important for the UAE, and added that there was no need for regulating foreign investment in the markets or placing restrictions on foreign investors, especially now that they were returning to the UAE markets at long last.
Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.