UAE's market status in sharp focus ahead of MSCI decision

The upcoming decision by index compiler MSCI on whether it will include the UAE on its emerging market index is likely to dictate investor decision-making this week.

Qatar and UAE stocks have rallied on investor optimism the countries will be raised from 'frontier market' status. Fadi al Assaad / Reuters

Three words are likely to dictate the decision-making of fund managers and stock market brokers this week: emerging market status.

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With just weeks to go before the index compiler MSCI revisits a decision on whether to include the UAE and Qatar on its emerging markets index, brokers and fund managers are also starting to position themselves for any announcements.

"[This] week, we are likely to see updates from local exchanges concerning measures to boost their eligibility for an upgrade," said David Verghese, a fund manager at Emirates NBD's asset management arm, which manages a total of US$1.6 billion in assets. He said with the majority of first-quarter numbers in, attention had now turned to the imminent decision on whether to upgrade both countries to "emerging market" status.

Stocks in Qatar and the UAE have rallied on investor optimism the countries will be raised from "frontier market" status at MSCI. The decision is due to be announced next month and take effect in May next year.

Qatar's market last week climbed for four days out of five on optimism for an upgrade and fund managers say the state will continue to benefit from increasing investment in the short term.

The country's QE Index rose 3 per cent last week to end at 8,711.49 points.

"There is also a lot of speculation [Qatar] will revise foreign ownership limits, which will drive investment," said Sachin Mohindra, the lead manager at Invest AD's GCC Focus Fund.

Implementation of the delivery-versus-payments (DvP) system, where securities are delivered and cash received on the same day, and the reduction of restrictions on foreign ownership, have been also flagged up as key components for a potential upgrade.

"Qatar is perceived to have a better chance due to the edge it has on [DvP] implementation," said Mr Mohindra.

An MSCI upgrade to "emerging market" status could be a major boost for the UAE's international reputation, as it would be likely to help make the stock markets more attractive to institutional investors, lift trading volumes and lower investors' risk perception of the country's exchanges.

FTSE Group became the first to categorise the UAE as a "secondary emerging" market in September, although it still classifies Qatar as a "frontier" market.

Qatar's market has repeatedly voiced intentions to push up foreign ownership limits to 49 per cent from 25 per cent.

The UAE limits foreign holdings to about 49 per cent, but many strategic companies allow little or no non-UAE involvement. Etisalat, the Middle East's largest telecommunications operator by market capitalisation, is off limits to foreigners, while Dubai's top bank Emirates NBD caps foreign involvement at 5 per cent.

Only 3.3 per cent of UAE stocks are held by foreign investors, a recent research note from AlRamz Securities showed.

The official deadline for applying DvP is now May 29, giving brokers and custodians breathing space to implement the system.

Mark Mobius, a veteran emerging markets investor, said last month the countries stood a good chance of securing an upgrade, although the impact may be "not that great" because they would have a "relatively small" weighting on the index.

Liquidity on UAE bourses will be closely watched, market commentators said.

Volumes of shares traded in the Emirates have slumped in the weeks following the start of unrest in parts of the Middle East and North Africa, when volatility in equity prices spurred some of the most active trading this year.

In both the country's main markets, at least 300 million shares changed hands, while volumes now stand at about half this amount.

The Abu Dhabi Securities Exchange General Index ended the week flat at 2,672.89 points, and the Dubai Financial Market General Index retreated 0.7 per cent to 1,596.80 points.

Despite subdued trading, fund managers are largely bullish on the long-term prospect for UAE equities.

"In the background, a lot of people are talking about equities which they haven't for a long time," said Saleem Kokhar, a senior fund manager at the National Bank of Abu Dhabi. "They're beginning to come back in."

Progress on the restructuring of debt owed by some government-related companies in Dubai, and investment inflows into the emirate from countries hit by political upheaval, has also helped buoy sentiment.

The cost of insuring against a Dubai default has narrowed to its lowest level since 2009 as concerns over the restructuring of Dubai World and Dubai Holding ease.

Although Dubai is still among the 10 riskiest sovereigns in the world, it has steadily moved lower in the risk-rankings and now stands below Egypt. Dubai's credit default swap spread has come down from 455 basis points at the beginning of March to about 360 basis points.

As Dubai's first-quarter results come to an end, investor attention is also likely to turn to Egyptian company results for the first three months of the year.

Among the biggest companies reporting next week is Orascom Telecom, which is in the spotlight as it spins off a new company after the Russian mobile phone provider Vimpelcom's takeover of its main assets.

Egyptian shares have hovered at about two-year lows in the aftermath of a revolution that brought much of the economy to a halt. The country's benchmark EGX 30 Index ended the week flat at 5,005.09 points.

Saudi Arabia's market, the largest in the Arab world, is expected to test new highs as the billions of dollars of government funding filter through to the economy.

The kingdom's Tadawul All-Share Index closed 0.13 per cent lower at 6,713.63 yesterday, the first day of the trading week.