Streamlining to Emerge

Capital Markets


Streamlining to Emerge

The bull and bear arrived in Dubai with the launch of the Dubai Financial Market (DFM) in early 2000. And as fate would have it, late that same year share […]

The bull and bear arrived in Dubai with the launch of the Dubai Financial Market (DFM) in early 2000. And as fate would have it, late that same year share values dropped by around 60%, echoing the regional slump. Aftershocks of the global financial crisis, and more recently the Arab Spring, have also been felt in Dubai and its environs. This has underscored the need for a streamlining of the regulatory environment, and diversified product offerings, to curb vulnerability to regional risk by appealing to the wider world. Therefore, a huge overhaul of the investment environment has ensued in pursuit of all-essential liquidity. Several milestones have been reached, not least in 2013, with the UAE’s historic upgrade to Emerging Market status.

The DFM is one of three stock exchanges in the UAE, including the Abu Dhabi Securities Exchange (ADX), also mostly listing UAE companies, and NASDAQ Dubai, which trades international stocks. The Dubai Gold & Commodities Exchange (DGCX) provides a range of futures contracts regulated, like the DFM and ADX, by the Securities & Commodities Authority (SCA). Meanwhile, the NASDAQ Dubai, a purely electronic exchange, is governed by the independent Dubai Financial Services Authority (DFSA).

The DFM’s IPO—oversubscribed by 118 times—in November 2006—placed a 20% stake in the public domain, with 80% subscribed to by government-owned Borse Dubai. The CFA Institute’s 2013 annual Middle East and North Africa Market Sentiment Survey identified rising confidence in the GCC, with the UAE earmarked for robust growth in 2013. Results revealed that political stability aside; investor confidence in the GCC was indexed to transparency and corporate governance issues. The DFM’s dedication to implement international best practices has now borne fruit. It has ranked among the world’s best performing exchanges in 2013; its index up almost 50% year-on-year in 1H2013, on a 67% higher average daily trading value of AED460 million compared to AED278.2 million. The DFM General Index had appreciated 37% by the end of June, with daily trading value soaring 85% year on year to AED467 million from AED252 million. Trading value rocketed 82% to AED58.8 billion year on year in 1H2013, from AED32.3 billion. Meanwhile, trading value climbed 222% to AED38 billion in 2Q2013 from AED11.8 billion a year earlier.

In 1H2013, market capitalization rose by 17.3% to AED213.4 billion compared to AED181.9 billion in 2H2012. The value of shares traded reached AED58.8 billion, compared to AED16.3 billion recorded during 2H2012, up 261.5%. Shares traded also skyrocketed 217.6% to AED44.9 billion compared to AED14.1 billion during 2H2012. The number of transactions executed during 1H2013 was up by 162.4% to 545,600 from 207,900 deals in 2H2012.

Regarding sector contribution to trading volumes, real estate and construction ranked first in terms of traded value, at AED23.5 billion, claiming 39.9% of the market’s total traded value. The banking sector came second on AED13.8 billion (23.4%), followed by the financial and investment services sector with AED10.2 billion (17.3%).

In June 2013, the real estate sector led the field with 34.86% of the total value traded, while the financial and investment services (34.86%) and banking sectors (19.49%) accounted for 50.71% of the total. Interestingly, however, financial and investment services, with a AED4.2 billion value, had soared from just a 4.88% share in June 2012. As of June 2013, the most actively traded stock was the DFM itself, capturing 14.4% of the monthly trading volume and 16% of trades, on a trading value of AED2.5 billion.

NASDAQ Dubai is a hedging and investment mechanism for GCC and international investors, blending NASDAQ credibility with regional intelligence to propel listed companies locally and worldwide. The value of equities traded in 1H2013 was $316.8 million, up 49% from $212.4 million year on year. June 2013 saw $51.4 million of equities traded on a 120% year-on-year rise.

DGCX, voted Best Global Commodities Exchange in 2013 by the Global Banking & Finance Review, offers futures contracts that hedge price risk exposure for physical commodities markets players—a first for the Middle East. Trading volumes in 1H2013 rose 101% year on year to 7,716,340 contracts worth $268.85 billion. Currency volumes, up by 112% from 1H2012, spearheaded the rise. June volumes, valued at $43.77 billion, marked a historic high of 1,593,150 contracts, up 79% year on year.

In arguably the DFM’s event of the year, and a landmark for the GCC in general, the UAE, along with Qatar, has been upgraded to MSCI’s Emerging Market status effective as of May 2014. The uptick applauds efforts to streamline the UAE market infrastructure for future growth. An estimated $370 million in new inflows to the UAE are forecast in HSBC’s MSCI Market Re-classifications Preview of May 2013. This is despite foreign investment mostly being confined to retail and residential property, hotels, tourism, plus banking, and other financial services. Free of the Frontier Market moniker, the UAE now expects greater capital flows when investor attention turns to the EMs. Crucially, this promises better quality flows, and hope for a greater focus on long-term investment to replace hot money. It will likely herald new listings, too. Furthermore, funds already active in the UAE and Qatar may opt to increase their exposure. The UAE’s equities market had reached a four-year peak as of June 2013. Significantly, the other GCC member states of Bahrain, Kuwait, Oman, and Saudi Arabia remain in the Frontier Markets Index. These could now potentially play catch-up through the healthy streamlining of their investment environments. The DFM has signed an agreement with the Kuwait Clearing Company to expedite securities transfer between the DFM and Kuwait Stock Exchange (KSE). This simplifies the transfer of the shares of shareholders in Kuwaiti companies to and from the DFM, the market of choice for Kuwaiti companies keen on dual listing overseas.

Islamic finance comprises a growing range of financial instruments that are on the ascendancy. Indeed, HH Sheikh Mohammed Bin Rashid Al Maktoum, UAE Vice-President and Prime Minister, and Ruler of Dubai, seeks to transform Dubai into the capital of the global Islamic economy. In February 2013, he introduced an initiative set to transform Dubai into a world center for sukuk, or Islamic bonds. Essa Kazim, Managing Director & CEO of the Dubai Financial Market (DFM), told TBY that, “The DFM today is labeled as an Islamic stock exchange in the sense that we have a sharia board and are sharia compliant.” In 2013, he was also elected Secretary-General of the new Islamic Economy Initiative Committee to tap further interest from among the world’s 1.8 billion Muslims. To do this, the committee was tasked with establishing a regulatory framework, and ensuring product compliance, including Islamic insurance (takaful), with sharia. The goal is to swiftly establish a sukuk standard to match that of equities. On March 11, 2013 Dubai Electricity and Water Authority (DEWA) listed its planned $1 billion sukuk on NASDAQ Dubai. Its value listed on the Dubai bourses rose to $10.17 billion. In broad terms, the ongoing advance of Dubai’s financial infrastructure seems set to gain added momentum in 2014.