Stock exchanges across the world are recovering from the global economic downturn but why are Middle East bourses still lagging behind? Jeff Singer, CEO of Nasdaq Dubai, discusses changes in regulation that could boost regional markets.
When jeff singer arrived in the UAE back in July 2008 to begin his new job as chief of Nasdaq Dubai he experienced just one week of the emirate’s five-year boom. “My first week here was incredible. It was a lot like Silicon Valley back in the late 90s,” he says. “It was about a week later that the markets started to go down and by the end of August most of the markets had gone down by about 80 percent.”
Two years later the region’s bourses have improved only marginally, says Singer.
“If you look at the ones that are truly trading — Saudi Arabia, Kuwait, Dubai and Abu Dhabi — it’s negative. The values on the stock market are not improving and the volumes are certainly not getting better either.”
Nasdaq Dubai’s recent merger with the Dubai Financial Market might be promising greater liquidity to companies trading there but Singer points out that there are three fundamental changes that must take place in order to boost value and trading volumes in the UAE.
The first is to introduce short selling, enabling investors to make money even when markets are down. “You can only make money in a bull market here, that needs to change. You can’t short the market here. So in a bear market the institutional investors run for the hills,” he explains.
“That (investors exiting the market) was what we saw in June 2008, and it was just unbelievable,” he says, referring to investor sentiment following a Morgan Stanley report which predicted house prices in Dubai could drop as much as ten percent amid the economic downturn.
“There has to be a way for institutional investors to make money in a bear market here. That is short selling. I know there are a number of proposals for it to happen, and I think the time is right now.”
He adds that there is a cultural resistance to short selling but says this could be down to confusion with so-called “naked” short selling, which was banned on many exchanges shortly after the collapse of Lehman Brothers. “The London Stock Exchange was correct in banning it (naked short selling) and then New York and the Nasdaq followed shortly [afterwards] and they were correct in doing it because what was going on back when they banned it was naked short selling, that’s different from covered short selling,” he explains.
Though naked short selling is un-Islamic in principle, short selling can be Sharia-compliant, says Singer. “It goes counter to Islamic finance that you can sell something that you don’t own so that’s been the big stop on that. But there are ways first if you can cover the short selling.
“Second if you share some of the profit from the covered short selling there are ways in Sharia that you can do that, you could put in a regime that would satisfy the bulk of Sharia scholars.”
Singer’s second suggestion, an ease in foreign ownership laws, is aimed at boosting institutional investors. The UAE’s restrictions on business ownership — which only allow a company to be 49 percent foreign owned unless it is operating from a free zone — have been blamed on holding back foreign investment in the past. Although several companies have lifted the ban, many remain restricted.
“You have to have institutional investors with retail investors. If you look at the trades that go on in the Middle East most of it is retail trading. Any of the liquid names on any of the nineteen stock exchanges in the Middle East, if they have any liquid names on them, it’s because they have strong retail and institutional investors,” he explains.
“There are a few companies like Emaar and the DFM that have gone public to a very broad market and they actually trade very well. So what will get institutions to trade in this mix? I think the countries need to ease on the foreign ownership limits.”
He also adds that additional measures within this include the introduction of “a clearing, and a settlement and a custody regime” that the international investors can easily work with.
“It doesn’t need to be exactly the same as it is in the London or the US. But it needs to have enough similarities that allow institutions to clear and sell and custodise that is somewhat similar to what they are doing right now because there are many institutions that won’t enter this market because of some of these issues.”
If foreign ownership rules were to be relaxed, it’s likely that index providers such as MSCI would look at reclassifying the UAE from a “frontier” to an “emerging” market, which Singer points out is vital to boost institutional investors.
“The third thing that I think would help the volumes and the values in this market [is for] the MSCI to reclassify this market from a frontier market to an emerging market,” he says.
Last week MSCI took the decision not to upgrade the UAE and Qatar to emerging markets, which reflected negatively on regional bourses. Instead the two countries will remain under careful review for potential reclassification.
“There are billions of dollars sitting in institutional funds that have a mandate to invest in emerging markets. So being in a frontier market these billions of dollars never find their way to this market,” he explains.
“But if it were reclassified then by mandate these companies would have to find this part of the world and start investing it in.”For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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