The UAE and Qatar markets are in focus as the highly anticipated MSCI decision on whether or not to upgrade these markets from ‘frontier’ to ‘emerging markets’ status was delayed until December of this year. The decision to postpone was announced on Tuesday after the markets closed.
In its press release the company said: "(MSCI) will extend the review period for the potential reclassification of the MSCI Qatar Index and the MSCI UAE Index from Frontier Market to Emerging Market status and it will announce these decisions in December 2011 in order to give additional time for market participants to assess recent enhancements implemented on the Qatari and Emirati markets."
Ghassan Chehayeb, Associate Director of Research at Exotix Limited said that an upgrade would have ignited a rally in the UAE.
The two GCC markets were rejected for an upgrade last year and since have made some crucial changes to help them meet the MSCI requirements for ‘emerging markets’ status including the introduction of a Delivery versus Payment (DvP) settlement system, the implementation of which is something the MSCI has been closely watching in the UAE.
A sticking point for both markets continues to be foreign ownership limits. The Qatar exchange has tried to check all the boxes for this upgrade, but it has not raised its limit on foreign ownership which now stands at approximately 25 percent. By comparison, the UAE’s foreign ownership limit is higher, at around 49 percent.
"The most important issues were the foreign ownership limits and DVP system. While most stocks have a 49 percent ownership limit, some of the remaining stocks, mainly in the Financials sector still have limits as low as 5 percent, such as ENBD which is the largest bank in the UAE, FGB and NBAD. This is an issue that has to be reviewed by the individual companies to decide whether to increase their limits or not," said Walid Hage, Head of MENA Sales & Business Support at Gulfmena Investments.
"Increasing their limits would definitely help. As for the DVP system, it was introduced in May and is still in “trial” period as investors are still testing and assessing whether it has been successfully implemented," Hage said.
What is at stake? The potential upgrade could have opened up the GCC bourses to multi-billion-dollar liquidity and driven index fund investments. The MSCI classification status is also prestigious and could have put more of a spotlight on the GCC and its investment opportunities. Since the decision has been delayed, these benefits are not off the table, just postponed.
"The classification is an important factor as it will provide much needed liquidity and a strong push to the market through the participation of international institutional investors tracking or benchmarked to the MSCI Emerging Markets Index," said Hage.
Had the June upgrade been approved it would not have gone into effect until May of 2012, so there is nearly a year lag in terms of implementation. However, come the end of 2011, the MSCI will be reassessing the UAE and Qatar — once again looking at the checklist and taking into account the opinions of institutional investors and asset managers as to how effectively and efficiently the markets are functioning.
"It’s my opinion that the market was not likely pricing in a high probability for acceptance to EM status. The small rally on the DFM and Abu Dhabi exchanges since the start of June had more to do with Dubai’s successful bond raise, economic recovery, and fiscal consolidation, and less to do with MSCI upgrade speculation," said Chehayeb.