Volumes, foreign limits may deny UAE, Qatar MSCI upgrade

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DUBAI: Low market liquidity in the United Arab Emirates and Qatar’s failure to raise foreign ownership limits threaten to deny MSCI emerging market status to the Gulf neighbors for a third time on Wednesday.

Index provider MSCI rates both the UAE and Qatar as frontier markets. It opted not to upgrade the pair at its reviews in 2009 and 2010, and was due to taken a decision in June this year but postponed its verdict to Dec. 14.

It said the delay was partly to allow market players more time to assess new delivery-versus-payment (DvP) settlement systems, which some of the bourses introduced in 2011.

MSCI has warned Qatar would be disqualified because of its 25 percent foreign ownership limit, but the gas-rich nation has not amended the ceiling, saying it was up to individual companies to open up their shares more to non-Qataris.

"I doubt it will happen for the UAE or Qatar, although the decision is not as clear-cut as we previously thought," said Fahd Iqbal, EFG Hermes strategist.

"Qatar is unlikely to make it because of the foreign ownership limits — investors want broader access to stocks.

"The UAE is in a better position because almost everything is in place — it just needs favorable feedback from market players and that is very difficult to predict."

But the UAE’s three bourses — Dubai Financial Market, Abu Dhabi Securities Exchange and Nasdaq Dubai — have been plagued by slumping trade and prices, which could affect MSCI’s decision, said Robert McKinnon, ASAS Capital’s chief investment officer in Dubai.

Dubai’s index is down 78 percent from a 2008 peak as the emirate’s real estate crash weighed on equity valuations on the property-led bourse, while turnover in 2011 is about a tenth of 2008 and at its lowest level for at least seven years.

"The dynamics of the market have deteriorated from six months ago — there’s less liquidity," said McKinnon.

"MSCI is a client-driven business…most MSCI clients probably aren’t up for the UAE being upgraded — they have a limited team, so would they want to assign an analyst to learn about UAE stocks when these will have such a small weighting?"

EFG’s Iqbal estimates the UAE and Qatar would get emerging market index weightings of 0.1 and 0.4 percent respectively.

"An upgrade would very positive, despite the tiny weightings — it could provide the trigger to bring interest back to UAE markets," said Iqbal. "Money would come in, not only from emerging market funds, but also from local and regional investors too."

EFG forecasts emerging market funds could invest $300 million in the UAE and $1 billion in Qatar.

Usually, at least three stocks must meet MSCI’s minimum requirements for a country to be attain emerging market status and Iqbal estimates only two UAE-listed stocks — Emaar Properties and Dubai Financial Market — comfortably do so, while a further two — Dana Gas and DP World — could also qualify.

Dana’s market value is only slightly above the benchmark set by MSCI, which may want more breathing space, while DP World is listed on Nasdaq Dubai, which will not adopt DvP until January.

In Qatar, about 11 stocks could join MSCI’s emerging market index, Iqbal estimates.– Additional reporting by Seltem Iyigun

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