Impact of the UAE's MSCI upgrade.
The MSCI index, widely followed by passive and active fund managers, is used to create portfolios and establish a benchmark for yield. MSCI has now updated its list of country indices, upgrading the United Arab Emirates (UAE) and Qatar markets to 'emerging market' status. The two countries have been eyeing such an upgrade since at least 2008. So what does it mean to individual and institutional investors? Will the upgrade drive significant change in the economic and legal landscape in the two countries?
In this article we look at the UAE context. However, most of our comments also apply to Qatar.
Long term strategies for portfolios seeking diversification almost always include investments in emerging markets. At the moment, investors in the UAE financial markets (whether local or from abroad) are not spoiled for choice. The most actively traded companies remain financial institutions, property development companies and construction companies. It has been a while since the last IPO took place in the UAE and, while certain reports have suggested that the return of the IPO is nigh, recent attempts have generally stalled. Indeed, the trend appears to be for UAE companies to consider listings abroad to access international liquidity. The UAE markets are not 'ready' yet.
EARNING THE UPGRADE
Taking a step back, what triggered the MSCI reclassification? Each year, MSCI analyses information on markets under review for a possible reassessment of their classification. In June, MSCI communicates its conclusions on the countries reviewed based on discussions with the investment community. It then announces, where appropriate, a list of countries that would be reclassified in the next cycle. MSCI only reviews a market for a possible reclassification if the new status is considered sustainable. This is important because it limits the potential disruptions that frequent reclassifications could cause.
MSCI (and other index providers such as the Financial Times Stock Exchange (FTSE) and Russell) use a range of criteria (and sub-criteria) to determine their indices. These can be quantitative or qualitative, covering all kinds of aspects: restrictions on foreign investment, restrictions on entry and exit of capital, the legal and regulatory framework for financial markets, activity of market supervisory authorities, lack of ambiguity and rapid application of laws and regulations, proper functioning of clearing and settlement systems based on international standards, competition among banks and presence of local banks on the international market, the regulation of securities depositaries and custody, the framework for short selling, availability of information (in English), etc.
BLIP OR BOOM
While the UAE MSCI upgrade has been welcomed by investors as part of a wave of improving sentiment in the country, important economic and legal issues (some of which were the reason for the UAE's previous classification) remain to be addressed. It has been suggested that the short-term effect of such an upgrade would be felt in a much greater way than the long-term effect1. In the past few weeks, stocks have risen and continue to rise, with worries on debt and property easing. However, foreign ownership impediments, the protection of local industry players and the potential conflict arising between local law requirements and international industry standards remain the headline issues, with more market regulation needed. If these issues are not addressed, there is a risk that the rise in the markets could be just a bump.
That said, the Federal National Council has been working hard on drafting and upgrading a number of key laws dealing with the development of the country's economic infrastructure and investment climate. In a statement on the Government of Abu Dhabi website, a new foreign investment law is anticipated to be issued "remov[ing] a large part of the regulatory and administrative obstacles to attract more foreign and Arab direct investment. It is aimed at creating a unified regulatory framework for foreign investment in terms of regulating investment procedures, registration and licensing. The law also deals with the advantages, tax exemptions and guarantees for foreign investors, as well as their rights and obligations." However, at the minute, no clear date has been set for the foreign investment law to be issued and the law remains in discussion. A long passage through the Federal National Council seems to be on the horizon.
The Securities and Commodities Authority (SCA), the UAE capital markets regulator, has also been busy. New regulations have: cleared the ambiguity previously surrounding the establishment and marketing of investment funds; introduced a legal regime for the short selling of securities, market making, the provision of liquidity and the lending and borrowing of securities. While these are all positive, the SCA has also mandated the use of locally licensed institutions for transactions involving the local markets. This has not had the same positive reception.
CEOs and boards of directors of large local companies in different industries, regulated and unregulated, are keeping an eye on the UAE financial markets for listing opportunities. However, if there is no liquidity, there will be no IPOs. If there is liquidity, we will likely witness a rush in IPOs. The reclassification on its own has, so far, driven retail investor interest but not institutional liquidity which remains cautious until the economic and legal outlook become clearer. The next couple of years will be crucial to the growth prospects of the UAE markets and will define the rest of the decade. If this was a school report, it would read, "good start, positive signs, more work and effort required."
It certainly is an interesting time to be in the UAE right now and to witness how the country takes up the challenges in the next few years!
Georges Attieh, Associate, Clyde and Co.
A corporate lawyer based in Abu Dhabi, Attieh specializes in international and domestic joint ventures, mergers, acquisitions and corporate legal restructurings. He also advises clients on the incorporation of various types of business and investment vehicles in the UAE.
ABOUT THE AUTHORS:
Partner, Clyde and Co.
Niall is the Managing Partner of the Abu Dhabi office. Qualified in three jurisdictions, he has considerable experience in a broad range of matters including corporate/M&A, energy, aviation and defence and international transactions. Niall routinely advises local and international companies in connection with the establishment, maintenance and termination of Abu Dhabi joint ventures, as well as corporate acquisitions and disposals and in connection with local regulatory requirements and developments.
"If this was a school report, it would read, "good start, positive signs, more work and effort required"
1 From Frontier to Emerging: Does Market Reclassification Matter? - Nasser Saidi, ex-Chief Economist and Head of External Relations at the Dubai International Financial Centre Authority, Dubai International Financial Centre Economic Note No. 19, January 2012
"It has been suggested that the short-term effect
of such an upgrade would be felt in a much greater way than the long-term effect"
2013 CPI Financial. All rights reserved. 2011 CPI Financial. All rights reserved.
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