Next week could be a turning point for the UAE and Qatar stock markets if they win the long-elusive upgrade — the emerging market status — from global index compiler MSCI.
On Wednesday, MSCI (Morgan Stanley Capital International) announced that it would release on June 20, the results of the 2012 Annual Market Classification Review that will decide whether the two Gulf countries finally get promoted from frontier to emerging market status.
A positive decision in favour of the two GCC markets will have far reaching impact on global investor confidence and consequent rebound of these two markets, analysts said.
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.
Analysts have estimated the UAE could attract up to $2 billion in new overseas investment in the event of winning the new market status.
This will be the fourth time both markets are being weighed for possible upgrade that happens every six months. In December 2011, the global index provider postponed to June the crucial decision on potential reclassification of both markets from frontier to emerging-market status.
In December, MSCI urged the UAE to introduce new regulations to allow securities borrowing and short selling, and repeated a plea to Qatar to raise foreign ownership limits from 25 per cent.
Analysts said the most significant impact of un upgrade on the UAE and Qatar bourses would be financial with the prospects of more institutions and foreign investor capital getting redirected to these market, thus giving them a much needed fillip.
A Dubai-based stockbroker said an upgrade at time is critical, as it would trigger a gush of foreign-fund inflow to revitalise the market.
Analysts said both countries would have to overcome significant obstacles in order to meet MSCI criteria. The min stumbling block is their reluctance to open up to foreign ownership. Another challenge both markets encounter is a lack of foreign ownership capacity.
In 2011, to comply with the MSCI criteria, the UAE and Qatar implemented the delivery versus payment (DVP) models on their bourses. Nonetheless, MSCI postponed its decision again in December 2011 to get more time to study whether both countries merit promotion and to give additional time for market participants to assess the effectiveness of these models and for the regulators and the stock exchanges to address the remaining concerns raised by international institutional investors.
The index provider expects both governments to introduce long pending capital market reforms, including introducing derivatives market and opening up foreign investment limits to broad base ownership to qualify for the upgrade.
Abdullah Salem Al Turifi, chief executive of UAE Stocks and Commodities Authority, recently denied that foreign ownership rules remained an obstacle to winning the new status. “We are waiting for their review... as we’ve fulfilled all their (MSCI) requirements,” the chief executive was quoted as saying.
Russell Investments, a global fund manager, announced in 2011 that under its classification, the UAE gained the “emerging market” status.
Russell said the UAE was the first and only GCC country to obtain the emerging market status within the Russell Global Index series.
The fund manager said its classification of the UAE as an emerging market remains different from the current frontier market designation given by MSCI, and Standard & Poors.