UAE misses out on emerging markets upgrade as MSCI defers decision

Markets Update: The UAE and Qatar fail to secure an upgrade to "emerging market" status from MSCI, the index provider, dashing the hopes of local investors for a second time this year.

Local investors were disappointed yet again after the UAE failed to secure an upgrade to "emerging market" status from MSCI, the index provider.

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MSCI extended its review of the UAE and Qatar's exchanges for inclusion in its Emerging Markets Index for the second time this year, saying that the two countries would remain as "frontier markets" for now.

"The MSCI UAE Index and the MSCI Qatar Index will maintain their frontier market status and will remain under review for potential reclassification to emerging markets as part of the 2012 annual market classification review," MSCI wrote in a statement.

It is the fourth disappointment from MSCI for traders in the Emirates since 2008, when the index provider first announced its consultation to potentially upgrade the UAE and Qatar from "frontier market" status.

Both are currently considered "frontier markets" despite relatively high levels of wealth, limiting the number of funds that can invest in them.

The MSCI Emerging Market index is used as a benchmark by fund managers, and can result in billions of dollars worth of extra liquidity for markets that are reclassified.

But the stumbling block for the UAE remained its implementation of new market systems, as in June.

MSCI had postponed its previous review of the UAE and Qatar to test the workings of the delivery-versus-payment (DvP) system, which ensures payment is made at the same time as a stock is bought or sold.

But institutional investors had their doubts about the effectiveness of the new system, MSCI wrote in its report.

"This is in particular the case for failed trades where a forced sale of assets, without the owner's consent, remains a possibility," the index provider said. "As a result many international institutional investors and their custodians continue to view the use of a dual account structure as a requirement."

However, draft laws proposed by the Securities and Commodities Authority allowing securities borrowing and lending may resolve these issues, MSCI added.

An upgrade for Qatar seemed even more remote, with the index provider citing "stringent foreign ownership limits" of blue-chip companies as a major concern.

"Any change to the status of the MSCI Qatar Index is conditional upon a meaningful increase of foreign ownership limit levels applied to Qatari companies resulting in increased foreign room," the report said.

Ahead of the announcement, UAE exchange officials downplayed the potential benefits of inclusion because of the headwinds hitting global equity markets. The mood was in stark contrast with the euphoria of June this year, when investors felt that an upgrade was likely.

Amid a prolonged slump in trading activity which has seen a number of brokerages forced to shut down, the Dubai Financial Market General Index has fallen 15 per cent to 1,385.07, while the Abu Dhabi Securities Exchange General Index has declined 10.1 per cent to 2,442.82.

The value of shares traded on the Dubai Financial Market in November was 2.8 per cent of the peak recorded during the same period in 2007.

HSBC and Rasmala Investment Bank are among the financial services firms to have closed their retail brokerages during the year, Shuaa Capital is also winding its retail brokerage down to focus on institutional clients, while a number of investment banks have scaled back their equity research and sales teams.

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