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A deal, not an exchange
The Dubai International Financial Centre's $1.8bn bite into Deutsche Bank's shareholding may represent a canny investment into a bank currently trading on low multiples, but leaves its financial centre, the DIFX, with only pocket change in the high stakes game of global stock exchange consolidation.
The DIFC is no doubt calculating that the struggle between Barclays and the Royal Bank of Scotland for ABN Amro will kickstart a round of banking consolidation within Europe. Mergers and acquisitions activity equals heady share price appreciation, leading to a large windfall for investors who get in early. Whether this is a long-term investment remains to be seen.
The DIFC is also engaged in a game of attracting the world's major financial institutions to its centre. Major holdings in the world's largest banks would no doubt help with that goal.
But what the DIFX, its subsidiary exchange, really needs is to attract companies to list on its market and to build trading volumes. Having financial institutions clustered in one building looks impressive, but without stocks to trade, these institutions can only do so much.
Before yesterday's news, the signs were looking good. As ArabianBusiness.com reported last month, the DIFX and the London Stock Exchange have held discussions on taking mutual stakes in each other.
Also, a number of Dubai's state-owned entities are tipped to list in a bid to spark interest in trading on the fledgling exchange, which on most days sees little or no trading. DP World is likely to list on the DIFX this year, with a secondary listing on the LSE. The flagship Emirates airline and the Jumeirah hotels conglomerate are also tipped for possible IPOs.
However, the DIFC's decision to spend $1.8bn on Deutsche Bank leaves it only $200m from its reported $2bn acquisition budget to develop relationships with the world's leading bourses - this at a time when the DIFX's competitors are forging ever closer partnerships with each other.
Regional exchanges outside the Middle East are rising in prominence. The deep liquidity pools or high concentration of capital required for a vibrant market used to exist in very few places in the world. New York dominated; London kept the Germans and the French in check in Europe; the TSE in Tokyo represented Asia's only significant player.
That situation has been changing over the last decade as money has begun to slosh its way around the world on the back of low interest rates - zero percent in Japan; a willingness by hedge funds and the world's banks to lend, and an ever-increasing appetite for risk from investors.
As a result regional exchanges have begun to increase in prominence as alternative pools of capital. Many companies in India now look no further than the domestic Bombay or National Stock Exchange to list, Chinese companies no further than Shanghai or Hong Kong...
Being a London or a New York-listed company still carries considerable cachet, but is no longer necessary - nor given US Sarbanes Oxley regulations, ultimately very attractive.
In the Middle East however not one dominant financial centre has yet to claw itself to preeminence. Bahrain, once the only player in town, has failed to take advantage of the first mover advantage. It now finds itself competing against Saudi Arabia, Qatar, and of course Dubai.
Whichever city in this region ultimately wins in the race, riches are certain. It is almost impossible to put a tag on the value of the London Stock Exchange to the UK economy - but huge doesn't do it justice.
With the LSE comes the investment banks - 480 at the last count, the hedge funds, the private equity companies, complementary rival centres such as Euronext Liffe or the LSE's own AIM, an army of rich investment bankers to drive house prices into the stratosphere, the bond markets, the brokers, the information providers... The list goes on and on.
For Dubai, a state without an oil inheritance, London offers a mouth-watering vision. However, the emirate not only needs to develop relationships with global financial institutions, it also needs to draw in and attract local, regional and international companies.
The investment in Deutsche Bank may prove to be a clever one financially for DIFC, but it does not address the single most important question concerning Dubai's gambit to become a global financial centre - how does it get stocks of the region's and the world's leading companies to list on its bourse.
Until that happens, the exchange's role will remain more Middle Eastern promise than a reality.
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