Markets resist urge to merge

Although the process of collaboration is at an early stage, it is believed the new market would look to increase liquidity by making itself more attractive to international investors.

UAE stock markets have weathered a “perfect storm” since the global financial crisis, but have yet to recover the levels reached in 2008. The worldwide international meltdown in 2008-9, the subsequent collapse in real estate asset values, followed by the fall in the oil price two years ago, all had significant effects for the two principal stock exchanges – the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). Neither has regained the levels seen before the onset of the great credit crunch.

But both have pulled back a lot of the ground lost then. Market experts say that the outlook is improving, and would be even brighter if one basic issue was addressed – the lack of liquidity in regional markets.

Mohammed Al Yasin, managing director of the National Bank of Abu Dhabi’s securities division, says that liquidity levels, as measured by the volume of shares traded, have improved in the second half of 2016. But he believes more needs to be done to boost underlying levels of liquidity.

“The problem has been that increases in liquidity are not sustained for very long. There is no depth in public markets, and that’s mainly because of the lack of initial public offerings. Slow markets are not good for liquidity or IPOs,” he said.

The third UAE market, Nasdaq Dubai, is aimed at international investors seeking capital markets access in the region. It is home to one of the UAE’s biggest companies, the global ports business DP World, and several other big companies. It has also become a platform for trading sukook (Islamic bonds) and recently launched a trading platform in equity futures.

Some analysts believe that having three markets is too much for a comparatively small investor pool like the UAE, and have advocated merging the two biggest exchanges. (Nasdaq Dubai and DFM already share many trading and back office functions.)

But so far, despite extensive studies on potential consolidation, the authorities in Dubai and the capital have resisted the urge to merge. Differences in regulatory regimes – there are three different regulators covering the UAE’s financial markets – and the interest of market constituents, have been cited as the reason to keep the status quo.

Instead, the challenge of liquidity is being addressed in a new way by the Abu Dhabi Global Market (ADGM), the new financial free zone in the capital. Last summer, ADGM and ADX signed a memorandum of understanding to explore the possibility of setting up a new exchange.

Although the process of collaboration is at an early stage, it is believed the new market would look to increase liquidity by making itself more attractive to international investors with their multi-billion dollar equity portfolios.

The UAE has already had a boost from being included in the MSCI emerging markets indices in 2014, and a new market in Abu Dhabi’s “offshore” centre could lure fresh foreign investment into the region.

The Emirates’ government could also play a greater part, Mr. Yasin believes. “The only party that can give an impetus for new listings is the government. It is time for governments to spin off more of their own companies. They do not have to sell 50%, between 5% and 15% would increase liquidity greatly while allowing the government to retain control. It has worked for Saudi Arabia, where the mere promise to sell a small part of Aramco by a yet undisclosed date in 2018 has given the market a boost,” he said.