ROBUST AND DIVERSIFIED

Dubai 2017 | FINANCE | REVIEW: CAPITAL MARKETS

Dubai's capital markets, like its wider financial universe, have established themselves as a globally relevant center for diversified trading.

Dubai's commitment to becoming an information society is matched by the sheer dexterity of its financial system, the beating heart of the economy. And meanwhile, the instruments available to the investor have increased in range, while the regulations that make the Emirate a hospitable investment destination have been tightened, not least in the gigantic sharia-compliant market, as we shall see later. In fact, Dubai's financial markets per se position the Emirate as the leading finance destination between Singapore and London.

The DFM

Dubai's capital markets are a double-edge sword comprising the Dubai Finance Market (DFM) and the Nasdaq Dubai. The former, established in 2000, seven years later became the Middle East's first exchange to opt for an IPO, subsequently playing a key role in the spin-off of state entities. The exchange, operating in compliance with sharia principles, is an onshore entity, and, therefore, unlike the Nasdaq Dubai, is regulated by the UAE Securities and Commodities Authority (SCA). In another regional first, in 2010 the Dubai Financial Market consolidated its operations with Nasdaq Dubai, enabling seamless trading across both bourses using a single investor number. Today, the shares of 61 companies trade on the DFM.

2016 at a Glance

For FY2016 the DFM printed a net profit of USD69.1 million, down notably from the USD207 million seen just two years before. The bourse accounts the—much slighter—YoY dip in terms of a 12% slippage in trading value to USD36.4 billion from USD41.4 billion for 2015, plus a 1% rise in expenses. Trading revenues accounted for 64% of the DFM's total revenues for the year.

In terms of equity performance, the Dubai Financial Market General Index (DFMGI) appreciated 12.1% to 3,531 points at end-2016 compared to 3,151 points at end-2015. Peering into the specific sectors we note that eight out of the nine sectors catered to DFM closed 2016 positively, with the services sector in the green by 36%. It was trailed by the consumer staples and discretionary sector, up 22.1%, and telecommunication sector, up 21.6%. The industrial sector in contrast shed a leaden 16.7% as global noise dented confidence in future performance. Market capitalization climbed 12.3% to USD91.9 billion YoY, while the value of shares traded, down 8.7% YoY, topped out at USD36.2 billion. This came despite the annual rise in the number of shares traded of 14.2% to 105.8 billion shares, compared to 92.7 billion shares traded in 2015. The transaction number, too, was down 14.4% to 1.3 million compared to 1.5 million deals a year earlier. Sector wise, the real estate and construction sector led the top three by traded value on USD15.6 billion, a sizable 43% of the market's total traded value. The banking sector followed on USD9.6 billion, or 26.5%, while the financial and investment services sector printed USD3.6 billion, claiming 10%.

For the year, the DFM's net foreign investment inflow was at USD98.1 million, with stocks bought by foreign investors valued at USD16.5 billion, and accounting for 45.5% of the total traded value. And the value of stocks sold by those investors reached USD16.4 billion on 45.2% of total value traded. On 30% of total traded value, the value of stocks consumed by institutional investors came to USD10.9 billion. The value of stocks sold by that investor group for 2016 was USD10.3 billion, on 28.4% of total value traded. This made for a net institutional investment in-flow of USD599 million. More recently, as of March 27, 2017 the DFMGI had shed 0.66% for the week, 4.9% MoM, and 2.17% YtD. Yet it had appreciated by 5.34% over the previous year. The index posted a 52-week high of 3,738.69 on Feb 09, 2017, and a 52-week low of 3,195.49 on Nov 14, 2016. In 2016, the DFM saw the listing of Kuwait's National International Holding (NIH) Company, raising the number of listed securities to 61 public joint-stock companies, with 13 dually listed companies. The total number of Kuwait-listed companies reached nine. Further activity from Kuwait registered in the sukuk arena, underling the DFM's international appeal. Incidentally, 2016 also saw the listing of Al Safwa Islamic Financial Services, which became the first private joint-stock company listed on the DFM's Second Market.

Regulation and Standardization

Market reputation, and the regulation that safeguards it, is everything, and in April 2016, a new regulatory body, the Dubai Economic Security Centre (DESC), was established in the Emirate under Law No. 4 of 2016. It functions as another firewall against potential irregularity that could impact the broader economy, specifically the financial universe. Notably, the DESC is mandated to oversee both the onshore and free zone markets. Standards of operation, too, have been fine-tuned, whereby in March 2017 the DFM published the definitive version of its Standard on Hedging against Investment and Finance Risks, a pioneering document that will advance the Emirate's capital markets in a turbulent world of fleeting investor sentiment. The standard is an addition to DFM's sharia-compliant protocol covering the Standard on Stocks and Standard on Sukuk issued in 2007 and 2014, respectively. Two risk types prominently addressed are property risk to be borne by the owner, who is liable for damage or loss of his property, and secondly reputational risk pertaining to sharia incompliance. The latter is particularly important as the sharia universe has been working to eliminate ambiguity surrounding Islamic interpretation of ever-diversifying financial instruments. The DFM has, after all, been the world's sharia-finance torch bearer since 2007, and further clarification can boost the volume of Islamic banks and financial institutions.

Nasdaq Dubai, the Future's Good

This exchange is a different kettle of fish, which being located within the Dubai International Finance Centre (DIFC) free zone, like the Dubai Gold & Commodities Exchange (DGXC) and Dubai Mercantile Exchange, is regulated by the Dubai Financial Services Authority (DFSA). Its principle advantage is that the onshore restrictions on foreign ownership do not apply. It offers investors a multi-asset and currency platform, where listed companies enjoy a simultaneous presence on both the local and international market. The bourse trades bonds, equities, derivatives, and real estate investment trusts, and is also a Murabaha (property financing) platform.

In March 2016, Nasdaq Dubai CEO Hamed Ali reported that it was poised to introduce futures contracts for Dubai Investment Company and Dubai Financial Market by early April, thus increasing the total number of such shares to 11.

The UAE's IPO activity for the year kicked off in March with the well oversubscribed listing of Emirates NBD's real estate investment trust (ENBD REIT) on the Nasdaq Dubai. ENBD REIT offered 94,594,595 ordinary shares at USD1.11/share, whereby the stock rose 5.17% to USD1.17/share.

Sukuks Plough Ahead

The Nasdaq Dubai has earned its stripes as a major sharia instrument provider, notably sukuks. By early June 2016, Nasdaq Dubai had seen the listing of seven new sukuks valued at USD4.55 billion. At that point it was trading around 80 listed sukuks and bonds with the latter accounting for a full three quarters of the total.
On October 10, 2016 Nasdaq Dubai and Ideal Ratings launched benchmark indices that track the performance of global sukuk, thus providing investors a more meaningful basis for informed trading decisions. Tracking over 1,800 sukuks worldwide with eligibility criteria that include a minimum issue size of USD100 million, data provided includes daily changes in price and total return, and monthly updates on yield and other core indicators. The new Nasdaq Dubai IdealRatings Sukuk Indices family features the Global Sukuk Index covering all currencies, and five sub-indices of issuances denominated solely in US dollars. The latter five comprise investment grade issuances, sovereign issuances, corporate issuances, issuances by financial institutions, and GCC issuances. In March, Kuwait's Warba Bank listed a USD250million sukuk to bolster its capital base and enable sustained growth. According to the DIFC, the move confirmed expanding collaboration between the UAE and Kuwaiti capital markets, as well as Nasdaq Dubai's global leader status for sukuk listings; recent data indicate a total nominal value of USD46.31 billion in sukuk from issuers in the MENA region and further afield.

Derivative, in a Good Way

The Dubai Gold & Commodities Exchange (DGCX), operating under the Dubai Commodities Clearing Corporation (DCCC), was launched in 2005. Essentially geared toward the trading of precious metals, it is also expand into foreign exchange, equity indices, and energy market trading. Not only the region's leading derivatives exchange, it is the only one through which participants can clear and settle transactions within the Gulf region. Volatility sparked by international events, not least Brexit and those unfolding stateside, but the Indian rupee devaluation and US Fed measures have also reverted to the safe(er) haven of derivative trading. In consequence, for 2016, the exchange posted a historical high trading volume on an aggregate of 19.7 million contracts, valued at USD439.5 billion. With a daily average of 76,835 contracts in 2016, the DGCX also printed its highest ever Average Daily Volumes (ADV). Strongest was the performance of the DGCX's currency segment, up 34% YoY, where Indian rupee products notably rose 34% from 2015. Meanwhile, the DGCX gold basket rose 61% YoY; gold futures climbed 29%) with Gold Quanto—a cash-settled, cross-currency derivative where the underlying asset is denominated in a currency other than that in which the option is settled—rose 158%. The DGCX's prestige was underlined when a pioneering deal was struck in 2016 with the Shanghai Gold Exchange to launch the Shanghai Gold contract in Dubai. Its significance cannot be overstated in that now an exchange beyond China is able to direct regional investors to the world's largest bullion market. And with no likely end to volatility in 2017, a similar performance for derivative products turned to for hedging and investment purposes may well be anticipated for the year.