Gulf markets need to integrate through mergers and shared regulatory frameworks in order to attract institutional investors and reduce reliance on retail clients, according to the former head of the Saudi Capital Markets Authority (CMA).
Abdullah Al Abdul Gader, who headed the Saudi CMA for five years and is the founder of corporate transparency non-profit organisation Boards Directors Institute (BDI), said a merger of Abu Dhabi and Dubai's bourses would be a positive move for the Gulf as a whole, but also called for the other five GCC bourses to work closer together.
"I think the capital markets of the Gulf will gain a lot from having better integration, and better yet if Abu Dhabi and Dubai merge," he said. "I mean, we need to put the seven markets of the Gulf in harmony. So, as an investor, you can go and invest in any one of these markets, with total ease, whether it is in regard to the payment system, or your broker. You don't have to be one entity, but we need it to be seamless."
That said, Al Abdul Gader said that such a union was not likely to be forthcoming anytime soon. There is no economic drive for this because these exchanges are owned by governments. So it's not like in Europe and the US where these mergers are motivated by frankly direct financial benefits, to reduce costs and increase volume," he said.
What is integral, he said, is reducing the reliance on retail investors in the Gulf, which make up some 95 per cent of traders in Saudi Arabia and over 80 per cent in Dubai.
"Retail investors are dominant in Saudi and in the other markets [of the Gulf], which is alarming to everybody," he said.
"Retail investors can be short-sighted in terms of true valuation of companies and, in cases where the market heats up, everybody gets into [it] for speculative reasons and then they can very easily be swayed here and there by market manipulators. It's something that we need to watch out for."
Al Abdul Gader said that institutional investors are waiting for an opportunity to enter the bourses of the Gulf, and would bring benefits not just because of the volume of capital that they would be likely to invest, but also due to the hands-on attitude they have towards investing.
"We need quality institutional investors, investors that should outperform the market as well as produce quality research, spread good investment culture, which we do not have yet," he said. "[We especially need] the ones that are not silent, the ones that will go and meet management and look into their books before they make a long-term commitment to that stock."
Al Abdul Gader, whose company brings together board members from companies, including Saudi Aramco and Saudi Basic Industries Corporation (Sabic), to conduct research into corporate governance, said that a surge in institutional investment would also have a knock-on effect for companies in terms of transparency.
He said that in many markets, companies with a good record in terms of transparency attract a 40 per cent premium on their share price from institutional investors — and even in terms of retail investors.