By Soren Billing
National pride may prevent Gulf bourses from merging. But there will be winners and losers.
National pride is likely to prevent Gulf stock exchanges from merging. But like with the region's many airline carriers, there will be winners and losers.
When the Bahrain Financial Exchange (BFX), the island kingdom's second bourse, opens its doors in the first quarter of next year, the GCC will have a total of nine stock exchanges.
That's a lot for a region with a population of around 39 million people, and for most of them it feels like even more after the financial crisis hit the Gulf's shores late last year and equity markets slumped.
The lack of liquidity in all markets outside Saudi Arabia, the bloc's largest, is deterring international investors and putting a crimp in government plans to diversify their economies. Despite that, a common Gulf stock market, if it ever does materialise, could be decades away.
"There would be a lot of synergies. There would be higher economies of scale and you would attract the same amount of capital. You would have high liquidity for stocks that usually are not frequently traded," says Fadi Al Said, head of equities at ING Investment Management Middle East.
Having a dynamic stock market is a key component of Gulf states' competing plans to become a business hub for not just the region, but for the vast area that sits between the global financial centres of London and Hong Kong.
Dubai has built the strongest brand to date and has attracted more foreign investment than its rivals.
But global best practice regulation at Nasdaq Dubai, its joint venture with the US bourse giant, has failed to win over the region's many retail investors, who often just see it as a costly burden. Shares were initially only priced in dollars, but despite allowing for dirham denominated issues and changes to the trading week to bring it more in line with the rest of the region, low liquidity remains a problem.
That has led to speculation that Dubai's flagship international exchange could merge with its sister company Dubai Financial Market (DFM). The two firms are owned by the same holding company, Borse Dubai.
"Under a consolidated approach - because Borse Dubai owns both DFM and Nasdaq Dubai - the merger can be looked into," Abdulla Al Awar, chief executive of Dubai International Financial Centre (DIFC) Authority, told UAE daily Emirates Business last week.
The two exchanges have already announced plans to merge some of their back office operations, which will see them trading on the same platform. But Al Awar added that he was not aware of any merger talks taking place.
After a bidding war with Nasdaq over Nordic stock exchange operator OMX in 2007, the US company agreed to sell 20 percent of its shares to Borse Dubai in exchange for control of the Stockholm-listed group. Nasdaq acquired a third of the now rebranded Dubai International Financial Exchange (DIFX) in 2008.
Still, merging Dubai's international player with the more locally oriented DFM could be a complex operation. The two are regulated by different bodies: Nasdaq Dubai by the Dubai Financial Services Authority (DFSA) and DFM, along with the Abu Dhabi Securities Exchange, by the Emirates Securities and Commodities Authority (ESCA).
"For me it's difficult to see how a full round merger would get around the different regulatory authorities that are in place right now. I assume that would be a...complicated and time consuming affair," says Fahd Iqbal, vice president of GCC strategy equity research at EFG Hermes.
Among Dubai's rivals in the race to become the region's stock exchange of choice is Qatar. NYSE Euronext, the transatlantic operator of bourses including the New York Stock Exchange, agreed to buy a 20 percent stake in the Qatar Exchange, successor of the Doha Securities Exchange, for $200m in June this year.
Then there's Bahrain, which has stepped up financial regulation and is touting its proximity to Saudi Arabia and expertise in the growing Islamic finance sector.
Kuwait is the second largest by trading volume and also the oldest by far, having launched in 1969. The UAE would need to merge all three of its stock exchanges to achieve the same scale.
They are all dwarfed by Saudi Arabia, which is the only market that isn't marred by low liquidity. In the UAE, stocks in real estate and financial services are the only ones that investors can be sure to buy and sell on any given day.
"Some stocks are just liquid because they are traded in Saudi. The probability of a stock being traded there than in Bahrain or on the Nasdaq Dubai is much higher," says Al Said of ING Investment Management.
But for international investors the Tadawul comes with its own set of limitations. As of August, the Kingdom allows foreign investors to buy shares, but only through a licensed intermediary who is technically the owner of the shares.
The Gulf is likely to mirror the European experience of a large number of national stock exchanges co-existing (albeit with a shrinking number of operators in the case of the latter). But if the London Stock Exchange (LSE) is the undisputed centre of Europe's financial community, with Frankfurt in second place, the question of who will carry the same title in the GCC is still very much up in the air.
"In the long term, when you think of the GCC you are only going to think about one or two exchanges," says Mahdi Mattar, head of research at Shuaa Capital.
"The economies of Saudi and the UAE are by far larger than the rest," he notes, but adds that it is unclear whether Dubai or Abu Dhabi will be home to the country's main market.
"UAE has a lead over Qatar. It has a wider listing, it has a greater penetration of foreign investors and it was the first exchange in the region to actually really see a substantial inflow of foreign investors coming in. So foreign investors tend to be more familiar with UAE based names than they are with Qatari ones," says EFG's Iqbal.
Still, a pan Gulf exchange does not necessarily need to be created through a merger of existing players, which would come with the cumbersome exercise of harmonising regulation in all six markets.
"If you have a pan Arab exchange that's set up in London then that would cater directly to foreign investors that are interested in seeking exposure to Arabian markets. That could end up stealing a bit of thunder from the Middle East based exchanges," he says.
As of right now, there is nothing to suggest that such a project is under way, but it remains a possibility, he adds.
Imad Awad, a former head of equity capital markets at
's investment banking unit who is currently setting up a Saudi focused investment bank, is most bullish on the Dubai Nasdaq.
"The growth will be in the exchanges that are the most dynamic, and I think Nasdaq Dubai has the best opportunity to grow, but they need to find the niches in the region. Once they find those, I think they will do marvellously," he says.
In a region dominated by family firms and state owned giants, one such niche could be focusing on start up firms, like the TSX Venture Exchange in Canada does.
The Calgary based company accepts listings of companies that do not meet the requirements for trading on the Toronto Stock Exchange, making it a riskier investment than the main index, but still ensuring more transparency and regulation than most start ups would have been able to provide otherwise.
"The region is really in need for something like that," Awad says.