FTSE picks regional stocks

Emerging market classification leads to inclusion of basket

A basket of diverse stocks from the UAE will soon be on the radars of more global fund managers thanks to the country's new classification as an emerging market. The 13 stocks will be included in the FTSE Global Equity Index Series from late September, said Jonathan Cooper, the FTSE regional managing director. They include seven companies from Dubai and six from Abu Dhabi, representing industries including energy, property, banking and telecommunications.

Being added to the index should give UAE stocks a higher profile among institutional investors and potentially attract more foreign investment. "We don't expect a surge on that day but it will be a change in profile for the UAE and the trickle-down effect will benefit the markets," said Mr Cooper. The country's bourses could use a boost as they have battled lower trading volumes and falling share prices for much of the past six months.

FTSE classified the UAE as a "secondary emerging market" last year but the change does not come into effect until the third week of September. FTSE is the largest indexes provider outside North America. According to Mr Cooper, there are more than 130 exchange-traded funds (ETFs) that are tracking various FTSE indexes with about US$100 billion (Dh367.31bn) in assets. About 20 per cent of those ETFs were tracking FTSE emerging market indexes.

"So about $20bn could be potentially tracking the performance of the UAE markets," Mr Cooper said. The most likely beneficiaries in the UAE of additional investments are the 13 stocks FTSE selected from the country's three bourses based on their risk profiles, levels of foreign ownership and liquidity. From the Dubai Financial Market, FTSE chose Emaar Properties, Air Arabia, Arabtec Holding, Dubai Financial Market Company, Dubai Investments and the telecommunications operator du. Out of the Abu Dhabi Securities Exchange, FTSE picked Aldar Properties, Aabar Investments, Dana Gas, First Gulf Bank, Sorouh Real Estate and Union National Bank. The ports operator DP World was the only stock chosen from NASDAQ Dubai.

Analysts say the impact is not likely to be felt right away. "It is a very positive step for the UAE markets but I don't think there will be an immediate effect on the state of liquidity. We probably will see additional foreign liquidity coming in the following months," said Riad Meliti, the chief executive at the investment bank Arqaam Capital in Dubai. "This specific event is encouraging and now we will wait to see if MSCI this year also makes a move to give any regional exchanges emerging market status," he added.

MSCI Barra, considered by some analysts to be a more influential index provider, evaluated the UAE, Qatar and Kuwait bourses for an upgrade from frontier market to emerging market status but said they fell short of the defined criteria. MSCI is due to review the UAE and Qatar markets again later this year. [e-mail]