Gulf investors are preparing for a key decision this week on whether bourses in the UAE and Qatar will be upgraded to emerging-markets status from their present frontier-markets ranking.
But volatility in global markets is likely to dampen any party in the event of a positive decision on Wednesday from the global index compiler MSCI.
"Last year, everyone was interested and thought that foreigners will come in if we get upgraded," said Mohammed Ali Yasin, an independent capital markets expert in Abu Dhabi. "But there's a lesser chance for it to happen now because there's less liquidity in the world for internationals to go elsewhere, especially the Europeans."
In December, for a second year, MSCI delayed a decision until June on whether to upgrade the countries to emerging-markets status. It announced that it needed to "give additional time for market participants to assess the effectiveness" of the delivery-versus-payment system in which securities are delivered and payment is received on the same day.
"Investors continue to stress significant concerns over the effectiveness of this new framework to fully ensure the safeguarding of their assets under certain circumstances," MSCI said in a December 14 news release. "This is in particular the case for failed trades where a forced sale of assets, without the owner's consent, remains a possibility."
Julian Bruce, the Dubai-based director of institutional sales trading at EFG Hermes Holding, pointed out that there have been no structural changes to the payment system since the last MSCI review.
"We had a post-trade error scenario recently and it was a horrible, inflexible mess which took a week to resolve," said Mr Bruce. "I think there have been difficulties due to the absence of precise parameters. The UAE exchanges feel they have done enough, but MSCI take their feedback from clients based on experiences. The catch-all of 'investibility' has no absolute definition and so remains open to interpretation."
Elsewhere, Gulf markets are likely to remain in the doldrums, with traders offering little hope of a strong revival unless there is a sudden turnaround in global sentiment.
With world stocks volatile because of the euro-zone debt crisis, Gulf bourses have been in retreat. Qatar slumped to an eight-month low last week, while Saudi Arabia, Kuwait, Dubai and Abu Dhabi have returned to early-February levels, and more declines are forecast.
Qatar's drop may surprise many, with the country's economy forecast to grow 6.6 per cent this year, after expanding an estimated 17.5 per cent last year.
After all, there is the prospect that immense state infrastructure spending in preparation for hosting the 2022 Fifa World Cup will spur long-term investors into buying into bank, cement and property stocks. But the tournament is a decade away, and foreign institutions, formerly long-term stockholders, have cut positions, with the market in some ways a victim of its own success; its regional outperformance in 2010 and last year means these funds still have some profits to book despite the recent slump. Selling has increased since banks paid out what traders described as generous annual dividends.
"Foreign investors are still selling Qatar stocks," said Samer Al Jaouni, the general manager of Middle East Financial Brokerage in Dubai.
The correlation with global markets is partly due to a lack of regional company or macroeconomic news, and investors hoping that second-quarter earnings could refocus attention closer to home are likely to be disappointed.
"I doubt Q2 results will have much effect on trading," said Mr Al Jaouni. "The latest correction means there are some attractive valuations in the market, but fundamentals are not really the key point, because the main players in the market are small, individual traders."
Such investors typically opt for short-term speculation in the most liquid stocks, making markets volatile and unable to mount a sustained rebound.
Dwindling foreign interest may partly explain the slump in trading on Gulf bourses, but regional institutions are also avoiding equities, opting to invest in fixed income.
"The yields they are getting from government bonds and sukuk compared with the risk involved is something institutions are really focusing on," said Mr Al Jaouni. "We need to see local institutions pump money into equities, otherwise prices will not increase, even if valuations are attractive right now.