Not Oil That Bad

The Abu Dhabi Stock Exchange (ADX) has become the cornerstone of the UAE’s broader economic plan as encompassed in its in its Vision 2030. The bourse has long embraced international best practice, and has forged strategic bonds with international exchanges. Taking a 10-year perspective from its inception, the basic metrics of the ADX tell a clear story. From 2000 to 2010 the general index rose from 1,267.2 (2001) to 2,719.9; MCap rose from $3.2 billion to $77.2 billion; broker numbers rose from 10 to 74; investor numbers rose from 3,020 to 894,517; value traded soared from $2 million to $9.4 billion, and volume traded climbed from 0.1 million to 17.6 billion.

As at January 2015 the UAE’s 126 listed companies had a market capitalization of AED4,480 billion, with the benchmark ADSMI General Index up 2.16% YoY as of February 13th.

SELECT DEVELOPMENTS

In June 2014 several stocks in the UAE commenced trading in the MSCI Emerging Markets Index having attained frontier market status due to increased interest from foreign investors; added to this were signs of financial and economic national maturity. Subsequent losses on Dubai’s key securities index, the Dubai Financial Market General Index, erased gains made in 2014, as a result of which the valuations of UAE stocks by December 2014 had approximated those of emerging market bourses, which include stocks from countries in the throes of political and economic turmoil such as Russia and Brazil. As a result, the premium between emerging market stocks and UAE stocks faded. According to Abu Dhabi-based asset manager Invest AD, quoted in The National, “some UAE stocks are now looking very attractive. If the oil price weakness is here to stay, if they remain weak for a long period of time, the case for a premium valuation becomes weaker.“ Investors had been willing to pay a premium for UAE stocks over other emerging markets given the gigantic government infrastructure programs being pursued to diversify away from the extractive sector, in stark contrast to more sluggish performance in the wake of the 2008 global financial crisis.

THE NUTS AND BOLTS

The ADX has around 70 listed securities. Listed foreign companies are 100% open to trading by foreign nationals, who may hold up to 49% of companies operating beyond the free zones. Trading hours run from Sunday through Thursday, where pre-open trading takes place from 9:30 am to 10:00 am, while continuous trading runs from 10:00 am to 2:00 pm. In 2014 the ADX adopted the new X-Stream Trading platform enabling a greater variety of financial instruments to be traded to boost investor interest. ADX Chief Executive Rashed Abdul Kareem Al Baloushi stressed that the system would also expedite trading, while providing greater security of execution. This underpins the ADX’s aim of becoming a financial hub able to host and facilitate other regional markets.

WIDER FOOTPRINT

The Emirate of Abu Dhabi is already building on its AA credit-worthiness. In 2013 the SCA approved the secondary listing on the ADX of the Abu Dhabi Government’s bonds that mature in 2014 and 2019. The move brought the government a presence on both the London Stock Exchange (LSE) and ADX, with simultaneous trading of Abu Dhabi Government bonds.

In the aftermath of the financial crisis the benchmark index hemorrhaged 48% for 2008, in stark contrast gaining 63% in 2013 on infrastructure-related bullish sentiment toward broader Emirati development. It had shed 1.6% for January 2015.

KEEPING IT LIQUID

With the seismic tremors resulting from a slowdown in the global economy and consequently deflated oil prices came the need to mitigate lost investor confidence. Accordingly, the first market maker operations on the ADX began in early 2015, with the bourse anticipating a boost to trading volume and less erratic price swings. Official data reveals that the General Index had shed more than 10% since October, when Brent oil was at $80 a barrel, before testing $50-levels in early on in the year. The index shed 23.8% from October to mid-December 2014, before succumbing to a period of fluctuation. Anticipating such environments, and to mitigate instability the National Bank of Abu Dhabi (NBAD) was licensed in April of 2014 to execute its market making business with available paid-up capital of $8.17 million to avail four key stocks of liquidity. These stocks are Aldar, FGB, Waha Capital, and Abu Dhabi Commercial Bank. NBAD, therefore, acts as a broker-dealer balancing supply and demand for shares by guaranteeing to hold a certain volume to enable buying and selling regardless of market conditions. The bank aims to expand the scope of its coverage across the UAE’s three exchanges, including the Dubai Financial Market (DFM) and the Nasdaq Dubai. In these equity markets liquidity is concentrated between around 12 stocks out of over 80 listed companies. And with trading activity predominantly that of retail investors, bull and bear sentiment can impact the index; notably in December 2014, Minister of Economy and Chairman of the SCA, HE Sultan bin Saeed Al Mansouri, implored investors to base trading decisions on rational fundamentals rather than gut feeling.

WOES POSTPONE IPOs

The National in mid-January 2015 speculated over the postponement of the anticipated AED576 million IPO of Massar Solutions following poor share take-up, where plunging oil prices were seen as the culprit. Notably less that half of the shares were taken up by the Emirati retail and institutional investors earmarked to purchase them. Amid such bearishness, the question now is the extent to which this might deter other listings in the current environment. Indeed, it appears that IPOs for Gulf Capital, Al Habtoor Group and the hotels wing of Emaar Properties may return to the agenda in 2H2015, circumstances permitting. Massar—the fleet management arm of Al Wathba—was to have been a touchstone for listing activity, as the first Abu Dhabi company to be listed amid the recent upturn in IPOs exclusively realized in Dubai. Taqa and Abu Dhabi Investment Company (Invest AD), the two controlling shareholders, keen to sell 20% each of their stakes, experienced disappointment before the subscription deadline of January 25th. As at mid-January, the ADX General Index had lost shed over 15% since early June, roughly co-synchronous with the slide in oil prices. For the period, the Dubai exchange’s benchmark index had shed close to 28%. Industry insiders have speculated that any IPOs in 2015 would likely be among industries forecasting notable growth in the GCC, including healthcare and education.

Ultimately—international noise aside—the broader picture isn’t grim. So let’s leave the final word to Philippe Ghanem, Vice Chairman and Executive Managing Director of ADS Securities. In a TBY interview he succinctly summed up prospects for the ADX thus: “I think that Abu Dhabi can play a major role—become a market-maker and price-producer for the industry—across a large number of markets. With a stable foundation of people, capital, technology, and regulation in a stable and secure country, Abu Dhabi has all the building blocks for success.“