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Thu 15 Dec 2011 07:29 AM

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UAE, Qatar fail to net emerging market upgrade

Gulf bourses hoped MSCI status upgrade would tempt investors, boost stocks

UAE, Qatar fail to net emerging market upgrade
The UAE and Qatar may be upgraded in June 2012

Index provider MSCI on Wednesday maintained the United Arab
Emirates and Qatar as frontier markets, once again delaying a much-awaited
promotion of the Gulf states to emerging markets status.

Both countries remain up for a possible upgrade in June 2012,
as part of MSCI's annual market classification review, the company said in a
statement posted on its website.

A promotion to emerging markets status could provide a boost
to stocks in the UAE and Qatar by attracting a large pool of investors who
track the company's benchmark equity indexes.

The delay, although not good news, may still prove to have
limited market impact as many investors expected MSCI to hold off the promotion
as markets deteriorate.

"Low liquidity may have made MSCI delay its decision to
its annual review next June - that's the diplomatic option," said Mohammed
Yasin, chief investment officer with CAPM Investment in Abu Dhabi.

"Market conditions are less favourable than they were
six months ago - UAE liquidity has dropped sharply," he added.

Dubai's benchmark stock index is down 78 percent from a 2008
peak as the emirate's real estate crash weighed on equity valuations on the
property-led bourse. Turnover in that market fell to a seven-year low this
year, or about a tenth of what it was in 2008.

In the long run, however, the delay will have negative
repercussions to stock markets in the Gulf region, said Ibrahim Masood, senior
investment officer at Mashreq Bank in Dubai.

"We don't have a great performer in the region to
remind emerging market investors that this is a part of the world they should
look at," Masood said.

MSCI had already denied a promotion to the UAE and Qatar at
its reviews in 2009 and 2010. It was expected to make a decision in June this
year but postponed it to Dec 14, partly to allow market players more time to
assess new delivery-versus-payment settlement systems, or DvP, which some of the
bourses introduced in 2011.

The UAE received "very positive" investor feedback
since the implementation of the new DvP model, but investors were concerned
about the effectiveness of the new system under particular circumstances, MSCI
said.

"This is in particular the case for failed trades where
a forced sale of assets, without the owner's consent, remains a possibility,"
the index provider said.

Those concerns have caused many investors to adopt
dual-account structures in the UAE, MSCI said, adding that the issue could be
solved with the introduction of new regulations allowing for securities
borrowing and lending agreements, as well as for security short selling.

As for Qatar, stringent limits to foreign ownership of
stocks, including those of large companies, remain the major stumbling block,
MSCI said, repeating a warning made in previous reviews.

"Any change to the status of the MSCI Qatar Index is
conditional upon a meaningful increase of foreign ownership limit levels
applied to Qatari companies," MSCI said.

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