This year marks the 10th anniversary of the founding of the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX), which form the nucleus of UAE financial markets under the umbrella of the Emirates Securities and Commodities Authority.
Before the foundation of the UAE's financial markets, trading in shares was done through the "parallel market", also known as the "over-the-counter" market. Shares certificates were traded manually between investors through brokerage companies licensed by the Central Bank. And there were only five licensed brokerages, each with its own price list for stocks. How will our financial markets evolve over the next 10 years? Have they reached a stage where the integration of the ADX and DFM into one single UAE financial market is the next step? Is that inevitable, and necessary, to ensure growth and development in a way that allows the UAE to take a leading place among markets in the region? The answer to these questions, in my mind, is, "Yes, without a doubt."
Over the past 10 years, our financial markets have seen many important events that contributed to their composition and growth into what they are today. At their debuts, they were hampered by the lack of listed companies and the lack of shareholder certificates deposited into their electronic clearing systems. Then they moved to the next level, at the end of 2003 and early 2004, when they began to see high volumes of trades with the inclusion of most public companies in the local markets, while investors started to accept the idea of depositing their certificates in these markets and trading electronically through them.
We also saw many new public shareholding companies enter these markets, increasing the number of listed companies and diversifying the sectors covered, which in turn attracted more investors' liquidity. And with every passing year, we saw a sharp increase in the activity of these markets, in the number of listed companies and the number of operating brokerages - or the number of companies registered with them. This helped to increase price indices for the markets to the highest points recorded since their inception and led to high volumes of transactions until they reached their peak in 2005 with a total of more than Dh509 billion (US$138.57bn) in both markets.
During that period, they managed to attract significant investment liquidity, not only locally but also regionally, particularly from Gulf and Arab investors who had entered as key players in our markets during 2005. Of course, what many didn't know at that stage was that behind every great rise there are declines that can be of the same magnitude. At the end of that year we witnessed the financial markets' bubble burst, causing heavy losses for investors - the first time our budding financial markets had experienced such a thing. Many observers feared that they would not be able to recover. But that is the nature of financial markets over the years and is at the heart of their composition, whether advanced global, promising global or emerging regional.
Whenever there is a high and exaggerated increase in stock prices, it is soon followed by a dramatic and rapid drop, especially if the rise was beyond what corporate performance and profits realistically indicated. As a result of the global crisis at the end of 2008, markets are now experiencing confusion, division and the restructuring of their financial and economical foundations. This situation is overwhelming for all, especially the developed economies. It has forced the governments of many countries to intervene to safeguard their financial systems. The expansion of the Group of Eight leading economies to the Group of 20, to include more emerging economies and their markets, is proof of these governments' acceptance of the shift of the economic balance of power to the east. It also highlights their understanding of the need to reconsider many of the regulations and laws governing financial transactions and risk profiling in global finance markets.
Since the beginning of the year, as the US economy shows signs of recovery and good growth rates return to China's and India's economies, officials have repeatedly insisted the UAE economy has the ability to recover and achieve GDP growth rates of about 2.5 per cent. I believe now might be the best time for the merging of the DFM and ADX under the banner of "Emirates Financial Market", which would be governed by the Securities and Commodities Authority (SCA) - and it should be a priority. Importantly, we are hearing that senior officials in both markets back the idea.
In my view, the current world situation provides the opportunity for the region's capital markets in general, and the UAE's in particular, to play a greater role in attracting the global liquidity that is moving from west to east through our region. It can do this by creating a bigger and stronger financial market, through the merger of the ADX and DFM (which now includes NASDAQ Dubai, too), which could accommodate the large amounts of liquidity that is mobilised worldwide now. A merged market could become an important financial body that might be ranked second or third in the region by market value. If merged today, the combined capitalisation of all companies listed on the market would be about $110bn. That would put it in second place in the area after the Saudi market at $354bn and ahead of the Kuwaiti market of $99bn. A merged market would also be in a stronger position in negotiations with global investment banks and ratings agencies to be included in the indices of major emerging markets such as the MSCI and FT. That in turn would attract more international liquidity because global portfolio managers would need to invest in markets comprising those indices to bench-mark their funds' performances against them.
It is my view that a merged ADX-DFM market could become the leading stock exchange in the Arab world. Its regulations, laws and legislation could cover all the needs of local and international companies wishing to list their shares as it would provide them with the flexibility to choose their inclusion in the local exchange under local laws, via the SCA, or international laws under the Dubai International Financial Centre and its exchange NASDAQ Dubai, and regulated by the Dubai Financial Services Authority. It would give companies a flexibility not available elsewhere in the region, which would enable many local and international companies to list their shares in a way that suited their needs. In addition, that would increase the depth of the market and attract new liquidity to it from, according to the latest data, an anticipated 800,000 or so investors.
Mohammed Ali Yasin is the chief executive of Shuaa Securities, part of Shuaa Capital, a regional investment bank