Making sense of markets is the most daunting task in economics. One is well advised to keep this in mind and look beyond daily appearances in Dubai, which is home to the most complex and diverse capital markets in the Middle East and North Africa. Next to its bourse, the Dubai Financial Market (DFM), the Emirate operates the region’s only, and greatly thriving, derivatives exchange in the Dubai Gold and Commodities Exchange (DGCX). The third exchange is NASDAQ Dubai, a leading market place for Sharia-compliant asset backed securities, or sukuk, which are commonly called Islamic-style bonds.
The DFM, incorporated in 2000, is the longest established of the three markets. It has 73 listed companies, according to the DFM website. This number includes 13 titles listed on NASDAQ Dubai as the latter outsourced its operations in July 2010 to DFM as part of a merger agreement.
The DFM’s strongest sector is real estate and construction, followed by banking. In June 2012, the two sectors accounted for over 60% of total traded value on the DFM.
According to DFM CEO Essa Kasim, the exchange is seeking to diversify away from its overemphasis on real estate and financial listings, because the growth sectors in the Emirate’s economy are underrepresented in the current mix. “Dubai is gifted with one of the most highly diversified economies in this part of the world with fast growing sectors, including trade, tourism, health care, and education,” Kasim noted.
Performance wise, an interesting period to take a snapshot of an Arab stock market is the month before the month of Ramadan. As Ramadan is not the time to undertake IPOs and major secondary issuances, companies and investors tend to position major actions right before or after the fasting month.
Noting that Ramadan in 2012 coincided with the peak of summer when slowing of bourse activity is to be expected, the 30 calendar days before Ramadan beginning on July 19, 2012 saw the DFM record a total volume of 2.1 billion shares representing an average daily traded value of almost $32 million. Emaar Properties, one of the bourse’s leading stocks by market cap, climbed over 13% during the period, while the DFM index moved 3.82% higher and closed at 1,535.71 points.
In taking a view on DFM activity in the first six months of 2012, January and June were the two months with slowed turnover while the spring months and July signaled increases in activity. Average traded value per day on the DFM in 1H2012 was around $68.35 million, representing a year-on-year improvement in daily traded value of 43%.
Average daily traded value on DFM in 1H2012 was also more than three times the turnover seen in the second half of 2011, which was a period of minimal investor appetite and which had marked the lowest point in DFM activity since the second half of 2004. From 2005 through 2009, daily traded value averaged much higher, ranging between $200 million and $400 million.
In terms of primary markets activity, the years before the global financial crisis were bumper ones for Dubai’s capital markets. From 2006 to 2008, 10 companies undertook IPOs on the DFM, including the market operator itself.
This flotation was a pioneering step in the development of regulated stock exchanges in the Middle East and North Africa, as Dubai was the region’s first bourse owner to integrate the operator in the capital markets play.
The experience of the worldwide financial crisis and the ongoing search for stronger institutional structures and mechanisms in the global economy led Dubai through a period where companies deferred dozens of IPOs to the future and investors treaded softly and with great caution.
MSCI, the international issuer of indices, struggled throughout recent years in finding the appropriate view on GCC exchanges. In 2009, it dropped Saudi Arabia from its regional indices after it could not come to an understanding with the operator of the Saudi Stock Exchange, which accounts for over 48% of cumulative market capitalization in the GCC and is the dominant securities market in the entire MENA region. An announcement in April 2012 that MSCI would restart publishing a domestic Saudi Arabian index in June 2012 was not yet implemented by mid-July.
In relation to the bourses of Qatar and the UAE, MSCI acknowledged repeatedly that the three operators of the Qatar Exchange, the Abu Dhabi Securities Exchange, and the Dubai Financial Market had invested great efforts into improvements and in meeting technical requests from international financial market participants. However, MSCI kept the three bourses as frontier markets under review for upgrade for an unprecedented four times as it was unable to come to a decision on classifying them as emerging markets.
The arduous relationship between the international financial services provider and Gulf operators hints that Arab capital markets have specificities with positive impacts that are not always captured by models from the West. The concept of a securities market holds universal appeal because an exchange is the most reliable and dynamic mechanism to discover the market value of a security, correct biases quickly, and fairly price the risk associated with it. Arab economies, for example, have a degree of cohesion based on cultural and family business traditions that eluded the European and US histories of market formation.
Reflecting those strengths is a project on which the DFM embarked only 12 years ago. The intermediate outcomes of the process, whether tending to the highly positive as in the years 2005 through 2008 or hesitant as in the recent past, are only a small part of the structural development of the Dubai capital markets, which are positioned on a dual bonanza of growing global economic reach and the GCC’s revenue streams from hydrocarbons.
According to Nasser Saidi, the highly articulate Chief Economist of the Dubai International Financial Centre (DIFC), the prospects for continuously positive trade balances of Gulf economies create a long-term perspective by which regional capital markets will contribute more to financial performances of GCC countries than oil revenues.
From early on, the UAE securities markets fulfilled important functions of widening the awareness of capital markets and opened new avenues for citizens to participate in their national wealth. However, expectations of short-term profit did not serve investors, says Jeff Singer, the chief executive of NASDAQ Dubai. “Wise investors are looking to the future, rather than regretting losses they may have incurred in the past. I believe that the UAE equity market will be an important driver of individual wealth, as well as the nation’s economic activity, in coming years,” he affirms.
Equity and debt markets in the UAE can tap into hitherto unrealized growth potentials and utilize further new impulses from both regulatory and market sides. While bonds and sukuk issued by corporations and sovereigns in the GCC find international demand, secondary markets for bonds in the region are under-defined and need to be developed, market participants and officials have observed.
A definite highlight in MENA capital markets is the DGCX, whose trading volume for the first six months in 2012 rose 172% year-on-year to 3.85 million contracts. Reporting strong annual growth rates since its establishment in 2005, the Dubai-based currency and commodities market is today reputed as the best currency exchange in the Middle East and recently won, in July 2012, an accolade of “Best Global Commodities Exchange 2012” by an international financial publication.
According to DGCX CEO Gary Anderson, the exchange, which debuted a copper futures contract in April 2012 as its latest innovation, plans to intensify investor education, introduce further products and enhance its global reach in the course of the year. “The DGCX has played a vital role in strengthening the UAE’s financial system by providing hedging tools and mechanisms that allow market players to transfer and manage risk within a well-regulated environment. And I’m committed to ensuring that the DGCX’s role in the UAE’s economic growth continues,” he concluded.
© The Business Year