The slow – some think too slow – evolution of the UAE stock markets progresses. A recent Chatham House report suggested that there could be room after all for several stock exchanges in the UAE and the Gulf, each with its own area of expertise, along the model of the United States and Europe, where smaller markets co-exist alongside the dominant centres of New York and London respectively.
It is a valid argument, though time will tell how long the likes of Chicago and Frankfurt can sustain themselves against the increasing financial gravity of the giants that dominate their time zones. The historical trend has been for the consolidation of market power in the big financial capitals, and I cannot see this process being reversed.
There may always be a role for local markets, but whether they can do more than take some crumbs from the big tables of New York, London or Tokyo remains problematic.
In the Gulf, excluding Saudi Arabia, there are now as many as six centres aiming for the title of "premier" financial market place, and three of these are in the UAE. The Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM) and the Dubai International Financial Exchange (DIFX) are advancing their own positions, sometimes in alliance with big foreign players like NYSE and Nasdaq. It is intriguing to see this piece of choreography being played out.
In Dubai, the process of rapprochement between the three players is continuing. DFM were brought together under the umbrella of Borse Duba, but, though there has been speculation about common pools of liquidity and regulatory unification, little concrete has emerged.
DFM and DIFX are still, to all intents and purposes, two separate and different markets, serving different functions and customers.
Investors have a welcome opportunity to test the competing attractions of them this week, when two IPOs reach their critical stages.
Drake and Scull and Damas come to the DFM and DIFX respectively, and the market vedict on these two flotations will help to further inform the debate about which model is the most efficient and advantageous for companies aspiring to public listed status in Dubai.
D&S and Damas have one thing in common – each represents a facet of the Dubai success story that has made the emirate a model for economic development in the Arab world.
D&S, as a contractor that supplies services to the big property projects for which Dubai is renowned, is at the sharp end of the real estate boom that keeps the Dubai economy turning; Damas, as a retailer of jewellery with shops in some of the city's grandest shopping malls, helps provide the "bling" factor which is just as much a part of the Dubai story. But the two IPOs could not be more different. D&S has chosen to go the DFM route, where, according to the rule book drawn up by the regulator, the Emirates Securities and Commodities Authority, shares must be offered at their nominal par value of Dh1, with investors allowed to set the actual trading price when dealings open.
Damas, in contrast, has chosen the more sophisticated listing procedures of DIFX, which allows investors to help set the flotation price via a "book building" exercise designed to pre-test market appetite for the shares. Damas will open at $1 per share tomorrow.
Each approach has advantages.
D&S gives retailer investors the chance to subscribe for equity, and I believe that a healthy culture of small shareholders is a desireable end in itself for a financial market. At the same time the big institutional appetite is also catered for, with some 40 per cent of the issue reserved for high net worth individuals and institutions in the GCC and abroad.
Damas has some big Gulf investors, but most interest has come from foreign institutions, which have been persuaded to put their cash into the stock at a very difficult time for world markets and emerging markets in particular. It is an achievement to have got the issue away at all in current circumstances.
The two different processes tend to produce different trading patterns in the after-market – the crucial phase immediately after flotation when investors get an indication of just how wise their decision was. Typically, for DFM-type issues, there is a high level of oversubscription, resulting in a big opening price jump but followed by a rapid leveling off of interest. We saw this most recently in the case of Ajman Islamic Bank.
The after-market in DIFX stocks has been less volatile, but so far has not shown the big, if temporary, appreciation in value characteristic of its rival. Often there is a fall soon after opening followed by a period of relative under-performance – less exciting for investors, perhaps, but arguably more appropriate for a sophisticated capital-raising machine with a long-term outlook.
Which is best depends on your investment priorities. But I believe some form of combination of the two approaches, institutionalising, formalising and regulating their alliance within Borse Dubai, would be the most appropriate way for Dubai's markets to advance.