What is Abu Dhabi Securities Exchange's strategy over the next two years?
Two years is a long time in capital markets. Our objective is to become the stock market of choice in the Gulf. We will do this by attracting both local and international investors and diversifying investment opportunities, including listing Exchange Traded Funds (ETFs) and creating a derivatives market. We will also continue to work closely with the Securities and Commodities Authority (SCA) to ensure we have a well regulated marketplace, focusing on integrity, transparency and disclosure.
As for derivatives, there is no organised derivatives market in the Gulf. We are trying to introduce this type of investment, the legal framework is there and we found that the authorities have an open mind about this. But such things take time and we are working on it. I think there will be a derivatives market here some time next year… when we develop a derivative market, of course, this will require a significant educational efforts because we have to make sure local investors know about such tools. We also need to encourage them to get involved in this type of investment.
How do you see foreign investment in ADX now and in the future?
In the first six months of 2008, 24 per cent of the total trading value on ADX was executed by foreigners. The number of foreign investors is increasing and we expect this trend to continue as we develop new products such as Exchange Traded Funds (ETFs). We also plan to develop a derivatives market. If the law on foreign ownership is changed, then we will see a lot of companies coming to this market. We are trying to attract more foreign investors, who are also tempted by the rapid economic growth and high return here.
We want to see both foreign dealing and foreign ownership in the bourse to increase. We had a roadshow in London and New York last year to show Abu Dhabi companies to foreign investors.
A lot of foreign companies are here to take advantage of the rapid economic growth and growing investment opportunities… high growth is expected for some years because the government is encouraging the private sector and is spending a lot on project.
I think there is a very positive outlook here, including political stability and safety, and that is why foreign investors are coming here, but we still hope more will come and we are continuing to work in that direction. But the only problem is the restrictions imposed on foreign ownership. So we would like to see these restrictions lifted or reduced so foreign companies and individuals can increase their investment further and take advantage of the growing opportunities
Some people say foreigners have become first-class speculators in ADX, what is your comment?
International investors from outside the region tend to be institutions, which are looking for value in medium to long-term investments, and these are usually less volatile than private investors. However, current market conditions internationally are more volatile than normal. The main reasons for foreign institutional investors to come here is the high return, which they have started to achieve over the past one and a half years.
They are making high profits, while returns in the Western markets are slowing down and that is why many foreign investors are looking to emerging markets mainly those with high economic growth, including the bourse here. My expectations are that foreign investors coming to Abu Dhabi will continue to increase in the long term.
What are your plans to attract institutional investment in the near future?
Attracting more institutional investors is a core part of ADX's recently announced five-year strategic plan, which is aligned with the vision of Abu Dhabi Government.
Some institutional investors are already drawn to our market due to the strength of the UAE and specifically Abu Dhabi's economy. The UAE's economic diversification, political security, legislative stability, investment climate and technological advancements have led the national economy to score high growth rates in 2007, while maintaining its advanced position on both regional and international fronts.
The latest figures from Abu Dhabi Chamber of Commerce forecast a growth rate of 8.2 per cent for 2008 and 13 per cent over the coming years. As a result, the contribution of institutions to trading activity increased from 18.5 per cent in 2006 to 26.3 per cent in 2007. Local companies and institutions captured 63.7 per cent of institutional trading value, followed by foreign companies and institutions with 30.6 per cent and Arab companies and institutions with 5.7 per cent.
To build on our country and emirate's economic strengths, and encourage further institutional investment, the ADX has been working closely with SCA, developing regulations that will allow the introduction of new financial instruments, such as ETFs, into the market. We have also signed custody agreements with a number of international banks and hope to sign more such agreements as well as continue with our successful roadshows and marketing programmes.
Can you justify the market's recent sharp fluctuations?
In the first half of this year, the index was up nine per cent and the value of securities traded on ADX trebled in the first half of this year compared to the same period in 2007. Furthermore, first quarter net profits for our listed companies increased by 45 per cent. This compares very favourably with the performance of markets elsewhere in the world.
Anyway, such fluctuations are normal and I don't think there will be any collapse as some fear – a collapse will not happen in this market because a collapse could only happen to a company with a poor outlook or problem, which is not the case here. I know there might be some turbulence over the next couple of months but it will not be like in the past and it is nothing compared with what is happening internationally
How do you see the transparency and disclosure of listed companies' communications in ADX?
ADX listed companies already report according to International Financial Reporting Standards (IFRS) and are currently in the process of adopting the new corporate governance code announced by SCA in 2007.
For two years running, ADX listed companies have been applauded by SCA for their compliance. In 2007, ADX listed companies won 14 out of 15 possible awards for superior disclosure standards and this year they won 24 out of a possible 30.
What was the reason behind delaying work in the Margin Trading System and what is overt impact on ADX transactions?
SCA regulate the UAE markets and we work closely with and support them. They have to issue the right rules at the right time. SCA has recently issued a proposal for margin trading that we expect to be implemented by the end of the year, the main points of which are: No Brokerage firm can deal in margin unless it gets a licence from SCA to do so.
The licencing requirements are related to the capital adequacy of the brokerage firm, its technical ability to handle such kind of business and the efficiency of human resources for that. The firm is obliged to open a margin account for its client to be separate from the cash account. This account should be subject to a margin trading deal with the client. The brokerage firm has to furnish the market with periodic reports about this kind of trading. The markets will nominate the marginable securities subject to the standards issued by SCA and the markets.
The by-laws determined some ratios that shall not be exceeded by the brokerage firm, such as allocated funds for margin trading shall not exceed 300 per cent of net shareholders equity of the firm.
The funds allocated for one client shall not exceed 10 per cent of net shareholders equity of the brokerage firm. The initial margin shall not be less than 50 per cent of the market cap of the marginable securities. The maintenance margin shall not be less than 25 per cent of the market cap of the marginable securities at any time after the purchase of these securities.
PROFILE: Tom Healy, Chief Executive, Abu Dhabi Securities Exchange
Healy joined ADX in September 2007, prior to which he was Chief Executive of the Irish Stock Exchange for 20 years. He has also carried out numerous consultancy and advisory assignments internationally, mainly related to capital markets, including for the World Bank, the European Union and USAID.
He has also served on a number of boards and committees in Ireland. He was actively involved in the World Federation of Exchanges and the Federation of European Securities Exchanges.