Dubai's ambition to become an international equity hub may have been put on ice by its need to repay debts, but the Gulf Arab state could still become a magnet for global equity funds if the UAE consolidates its bourses and earns MSCI emerging market status.
In 2007, Dubai agreed to pay $4bn for stakes in Nasdaq OMX and the London Stock Exchange, saying the buys would help the emirate draw in international liquidity and become the bridge between markets in the US, Europe and Asia.
But, faced with looming debt repayment deadlines, Dubai has been forced to scale back those plans.
Borse Dubai, which has controlling stakes in local bourses Dubai Financial Market and Nasdaq Dubai, in December sold about half of its stake in exchange operator Nasdaq OMX for $672m as both sides slowly detach from an alliance forged in pre-crisis days of cheap borrowing and leveraged takeovers.
Borse Dubai, owned by Dubai's sovereign wealth fund, plans to use the funds to pay down debt as the emirate climbs out of an approximately $115bn debt hole.
"Buying the LSE stake was part of Dubai's strategy to become the regional financial centre and I think it has achieved this, but does it make sense to own the stakes in Nasdaq OMX and the LSE?," said Mohammed Yasin, CAPM Investment's chief investment officer. "I don't think they've added value to Dubai's markets."
Local turnover is at six-year lows and many blue chip stocks are down more than 70 percent from their 2008 peaks, while the combined value of Dubai's Nasdaq and LSE stakes has fallen by nearly half.
Besides raising much-needed funds, the Nasdaq stake sale may also reflect a shift in focus towards boosting local markets, rather than trying to piggyback onto global bourses.
"The [Nasdaq] sale is not necessarily an acknowledgment Dubai's strategy hasn't succeeded," said Abdul Kadir Hussain, chief executive and fund manager at Mashreq Capital. "What hasn't worked is having more than one exchange, with these not having enough scale to really matter in a global context."
DFM bought Nasdaq OMX's one-third stake in Nasdaq Dubai, with the two markets switching to a single trading platform and synchronised opening hours in a bid to bolster declining turnover.
But such measures have failed to make a major impact and analysts say there is simply insufficient liquidity to sustain three bourses in the UAE - two in Dubai as well as the Abu Dhabi Securities Exchange ADI.
There have been no initial public offerings in more than two years, forcing many brokerages to close and spurring the Dubai and Abu Dhabi governments to discuss a bourse merger.
"If the UAE can crack that, then having an OMX trading platform and access to exchanges like the LSE and Nasdaq is only positive," Hussain said.
"It's more a factor of getting enough scale - that should be the priority, not only for Dubai, but Abu Dhabi as well. The local equity market is the basic cog in the wheel."
It is unclear whether the merger talks are restricted to consolidating just the Dubai Financial Market and Nasdaq Dubai or whether Borse Dubai's other assets - remaining stakes of 15 percent in Nasdaq OMX and 20 percent of the LSE - are also included.
Creating a single exchange will help the UAE's bid to be upgraded to emerging status by index compiler MSCI, analysts said. With the next review slated for June 2011, Dubai has targeted bringing a delivery-versus-payment settlement system by March, to address one of the issues cited by the index provider for keeping the UAE's frontier market classification in 2010.
The system will make payment and share ownership transfer nearly simultaneous, whereas at present delivery of securities is not related to payment.
"For the first time in two years, we see a greater than 50 percent probability of the UAE qualifying for an MSCI Emerging Market upgrade in 2011," Egyptian investment bank EFG-Hermes wrote in a December report. "On an average daily basis, value traded in the first year could increase to $118m [from $83m] in the UAE."
EFG says this forecast only includes potential foreign inflows and an MSCI upgrade is also likely to pull in more local and regional investors.
"The long-term impact could be exponential," the report says, adding assets under management could increase by $1.5bn, allowing for likely index weightings.
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