The UAE and Qatar have to wait again for months to undergo a critical review by global equity index provider MSCI for the coveted market upgrade to “emerging market” status.
The MSCI (Morgan Stanley Capital International) on Wednesday maintained the UAE and Qatar as frontier markets after a review while keeping South Korea and Taiwan in their emerging market classification.
The long anticipated reclassification of the UAE and Qatar would have given stock markets in the countries a major impetus by placing them among the preferred investments destinations of global investors who track MSCI’s benchmark indexes.
According to analysts, approximately $7 trillion in assets are benchmarked against MSCI indexes.
The next review by MSCI will be in a year, when the UAE and Qatar can hope to join other emerging markets such as India, Turkey, China, Russia and Brazil, amongst others.
A statement from MSCI said on Thursday that “the MSCI UAE Index will remain under review for a potential reclassification to Emerging Markets as part of the 2013 Annual Market Classification Review.”
The MSCI also noted that “international institutional investors often establish segregated custody and trading accounts in Qatar and in the UAE to mitigate the risk from local brokers having unlimited access to the trading accounts. This dual account structure results in significant operational burdens associated with the need to transfer shares from one account to the other prior to trading.”
The MSCI said while the UAE meets all the requirements for promotion, there are specific market accessibility issues related to custody, clearing and settlement due to a delay in changing the current requirement that international investors still need to operate with a dual account structure.
For Qatar, MSCI said the very low foreign ownership limit levels imposed on Qatari companies is expected to be the only remaining impediment to the reclassification of the MSCI Qatar Index to emerging markets.
The MSCI had previously retained both Qatar and the UAE in frontier status in 2009, 2010 and 2011.
Dubai’s DFM General Index, which has advanced 8.6 per cent so far this year, fell 0.5 per cent on Thursday while Abu Dhabi’s ADX index has risen 4.7 per cent and Qatar’s QE Index dropped 5.7 per cent.
Georges Elhedery, head of Global Markets, Mena, at HSBC, said for the UAE, the major sticking point is more technical.
“The market has operated a delivery versus payment — or DVP — model now for a year, meaning that there’s no time lag between stocks and cash being exchanged. The main concern of investors was control of the assets should settlement instructions not match. The model introduced last year did not address this issue and since December 2011 no further changes have taken place. However, the exchanges are looking at how they can improve the model to meet MSCI’s and hence investors’ concerns, so they are taking action.”
Elhedery said although Qatar has taken a positive step by introducing a new fail trade mechanism that address the concerns of losing control over assets that results in cash close outs in the event of any error sales committed by brokers, concerns remain largely focused on foreign ownership levels.