Global woes overshadow MSCI hope for markets

Exchange officials say the benefits of an upgrade of the UAE to "emerging markets" status by index provider MSCI may not be as significant as once thought in the current market environment.

Exchange officials say the benefits of an upgrade of the UAE to "emerging markets" status by index provider MSCI may not be as significant as once thought in the current market environment.(AP Photo/KShow more

UAE stock exchanges will struggle to benefit from an upgrade to emerging market status as international investors, battered by the worsening global economic crisis, become more difficult to attract.

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The stark analysis was made by Rashed Al Baloushi, the deputy chief executive of the Abu Dhabi Securities Exchange (ADX), on the eve of a long-anticipated decision by the global index compiler MSCI Barra on whether to upgrade the UAE and Qatar to "emerging market" status from "frontier".

Compared with the euphoria surrounding the UAE's last push to secure an upgrade in June, MSCI's latest review comes at a time of deep pessimism among investors.

The inclusion of UAE stock markets in MSCI Barra's emerging market index could still bring billions of dirhams of investment into local stocks but would be overshadowed by the deteriorating global economy, Mr Al Baloushi said.

"For two or three months, there's not a single piece of good news coming out of the global economy. This is making a global investor hesitant and just waiting for the right time," he said.

Global stocks have been hammered by Europe's growing financial crisis, with the MSCI World index of global equities down 8.6 per cent since the start of the year, having experienced a sharp sell-off since August.

The UAE's markets have fallen further, with the Dubai Financial Market (DFM) General Index down 14.5 per cent so far this year and the ADX General Index down 9.9 per cent during the same period.

The UAE and Qatar are classified as "frontier markets", limiting the number of funds that can invest in them. The two countries have been reviewed for reclassification three times since MSCI's consultation began in 2008. A decision originally expected in June was postponed for six months to test the UAE's market systems in a move that surprised some analysts and convinced others that an upgrade this month was all but certain.

This time around, investors felt the UAE's chances of inclusion were slim, having seen their hopes of inclusion dashed three times in as many years.

"I'd prefer not to keep my hopes too high," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment. "Liquidity will continue to be the obstacle to how much money will come into the market."

The results of MSCI's review will be announced at 2am local time tomorrow.

The MSCI Emerging Markets Index, which includes heavyweight economies such as Russia and China, is used as a benchmark by fund managers who can bring hundreds of billions of dollars in capital inflows to included markets.

But the bleak outlook for the global economy was convincing many investors to remain on the sidelines, with the MSCI Emerging Markets Index falling 19.6 per cent to 924.91 since the beginning of the year.

UAE stocks account for about 0.1 per cent of emerging market fund managers' investments, with holdings having collapsed since Dubai's financial problems, according to data from Bank of America Merrill Lynch.

The value of stocks traded on the DFM last month was 2.6 per cent of the same period in 2007, amid a spate of brokerage closures.

New companies listing on local exchanges have picked up from last year, but not enough to reduce the numbers of investment banks reducing their equity research and sales teams.

"It's phenomenally quiet and difficult to focus on it - to justify it as a revenue stream would be difficult," said one banker in Dubai, who asked not to be identified.

The flotation of Eshraq Properties this year was a lone sign of life amid a drought of new listings, alongside two insurance companies forced to make an initial public offering because of regulatory requirements.