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Sun 3 Jun 2007 12:00 AM

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Marketing the market

Arabian Business reports on why last week's investor conference in London could be just the beginning of the DFM's global drive for institutional investors.

As the he Dubai Financial Market (DFM) evolves into a sophisticated, mature exchange, improvements in corporate governance and the attraction of foreign investment have both been cited as part of the learning process.

However, perhaps the most important development that could cement the sustainability and long-term growth of the market, is the influx of institutional investors to the fledgling bourse.

Historically, international investors have been held back by a lack of exposure to the region. Emerging markets used to mean Latin America, Eastern Europe and Asia ex-Japan. The Middle East rarely came into the equation.

In fact, such are the benefits of welcoming institutions to get involved in the market, the DFM's backroom staff have embarked on an international recruitment expedition. Last week over 230 London-based institutional investors and fund managers held 215 meetings with senior representatives of DFM-listed companies at the DFM's international investor conference in the English capital.

The extensive list of high-profile institutions and funds that took part included Citigroup, Deutsche bank, Morgan Stanley and Merrill Lynch. While hosting a conference to lobby potential investors is not exactly groundbreaking, however, it could just be the beginning for the DFM, which is increasingly focused on snaring international institutions and the many advantages they bring to a market that is still finding its feet. Such was the success of the conference, Essa Kazim, chairman of the DFM, admitted that he would likely be taking the Dubai bandwagon on the road to the US, other parts of the UK and the Far East in the next 12 months. So, as Ahmed Badr, financial analyst at HC Brokerage tells
Arabian Business

: "This is just the beginning in the drive for institutional investors. They'll have to go to the US of course, but the UK is just the beginning."

Highlighting the need to attract more strategic investors to the DFM to bring "increased stability", Saad Abdul Razak, CEO of Dubai Islamic Bank was one of the main lobbyists at the conference. Other senior members of the DFM community in attendance were Adel Ali, CEO of the bourse's youngest member, Air Arabia, and Arif Amiri, director of investor relations, corporate governance and business development at Emaar Properties, who stated that the DFM roadshow would play a major role in building "Dubai's global standing as an ideal destination for overseas investment". Commenting on the outcome of the conference, Kazim spoke of the DFM's "proactive initiative" to encourage investment companies and fund managers to get involved in the market.

He added that the conference demonstrated "the DFM's vision to support listed companies and create a new segment of strategic investors as per the market's long-term strategy".

Other DFM-listed companies that made the journey to London included Shuaa Capital, Dubai Investments, Arabtec Holding, du, Aramex, Salam International Investments, National Central Cooling and Union Properties. Also well represented at the conference was Tamweel. According to Adel Al Shirawi, CEO of the UAE-based finance company, attracting institutional investment into the DFM is crucial to its ongoing evolution. "It's important to change the mix of existing investors and equity holders from speculative to institutional players who tend to go for strategic allocations and hence tend to stay longer with the stock and reduce volatility," he tells
Arabian Business


"Another advantage is that these institutions bring more in-depth analysis into play in the market rather than rumours - they will issue shares on technical and fundamental grounds instead of just hearsay," he adds.

Fahd Iqbal, senior analyst and strategist at EFG-Hermes, believes that with the reduction in volatility that institutional investors could help bring to the DFM, there will also be improvements in its pricing mechanism.

"Institutional investors would help bring some much needed stability to the markets, by virtue of their longer-term view and more fundamentally-based analysis. This will gradually help improve pricing efficiency and attract more participants," he explains.

"There is also the argument that the larger average transaction size associated with institutional investors is good for revenues," he continues.

Iqbal also believes institutional investors could help spread trading volumes across a broader list of companies. According to Iqbal, this is a process that is already underway at the moment, but it is still the case that 12 stocks account for 75% of the DFM's total trading value, but only 25% of its market capital.

Although the DFM is only now setting out on its global road-trip in search of institutional investors, there's no doubt that an influx of sophisticated investors into the DFM is already in motion. Last month Dubai's benchmark index broke the pivotal 4000 barrier for the first time this year.

And, using the second week in May 2007 as an example, it is clear to see that the market currently enjoys a significant amount of institutional investment. In the seven-day period, the value of stocks bought by institutional investors passed the US$490m mark. Meanwhile, in the same week, the value of stocks bought by foreign investors reached a whopping US$653.7m, making up 34.4% of the total value of stocks traded. According to Badr, institutional investment made up around 22% of trade on the DFM in April. He goes on to explain: "You'll find that over 30% of May's trading was from foreign institutions or foreigners in general.

Liquidity [in the DFM] is now high where everyday the average is over US$544m of trading and this is [increased] by foreign investors," he adds.

As the DFM slowly but surely develops, a number of factors that in the past prevented institutions from getting involved are gradually being eradicated as the market opens its doors to international investors.

"Historically, international investors have been held back by a lack of exposure to the region. Emerging markets used to mean Latin America, Eastern Europe and Asia ex-Japan.

"The Middle East rarely came into the equation. Therefore there was little knowledge or experience regarding the region," explains Iqbal.

"Now that more global investors are aware of exchanges like the DFM, the main concern is the openness of the market, corporate governance, and overall liquidity," he adds.

Another major recent shift which looks set to bring more international institutes to the DFM is a general reduction in investor costs, as Badr explains. "In the past the market was very expensive and you were paying a lot of money for small earnings but now the DFM is much more attractive to institutions and the market is starting to mature."

Another obvious barrier to global investment institutions is the restrictions on foreign ownership. Stock markets across the GCC are actively seeking foreign investment after last year's crash that saw four of the region's seven bourses lose over 35% of their value.

However, there still remains restrictions over the proportion of shares in listed companies available to foreigners. Admitting that restrictions against international investors is a definite hindrance to bringing institutions to the DFM, Al Shirawi claims that things are slowly but surely beginning to change.

"At Tamweel, we have announced that we have increased our international shareholder allocation from 15 to 40%," he says. Al Shirawi adds that a lack of short selling or hedging mechanisms could also be a factor putting institutional investors off the DFM.

As the market matures, no doubt these restrictions will gradually be overcome and we will see more and more institutional investors heading to the GCC.

Only time will tell just how successful the DFM's trip to London was in tapping up institutional investment. If the fact that the conference had to be extended by a day due to its popularity is anything to go by, then the early signs are certainly promising. And this really could be the beginning of a significant stride forward, not just for the DFM, but for the markets across the GCC.

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