19/05/2014

MSCI is no longer part of Morgan Stanley but is a worldwide, influential and leading provider of investment decision support tools.

The recent reclassification of the MSCI UAE Index from Frontier Market to Emerging Market status, announced as part of the results of MSCI’s semi-annual review meeting held on May 14, 2014 in Geneva, brings positive news to the market and is poised to significantly improve overall market efficiency in the Emirates.

The MSCI UAE Index consists of nine companies, namely: Abu Dhabi Commercial Bank, Aldar Properties, Arabtec, DP World, Dubai Financial Market, Dubai Islamic Bank, Emaar Properties, First Gulf Bank and National Bank of Abu Dhabi.

MSCI’s decision to upgrade UAE reflects a growing realisation of how far the country’s economy and its financial market have rapidly developed in recent years. The change from frontier market to emerging market status reduces the perceived risk of investing in a market and is therefore extremely significant for the UAE. This change also means that the country’s financial markets are, to a large extent, compliant with the ever increasing global investor relations and corporate governance standards that are a key for improvement in the overall efficiency of a market.

This rise in status will open up a wider pool of investor capital available to tap for both stock markets and companies in the UAE as foreign institutional investors, including passive index tracking funds, start entering the market. This will result in a positive liquidity boost, not only in the nine scrips mentioned above, but also in shares of other UAE public listed companies.

Ryan Mahoney, portfolio manager at Dalma Capital Management Limited, noted that “inclusion into the MSCI Emerging Markets index will act as the marginal buyer in the near term – this is likely to provide further momentum in current bull move.”

In addition to the liquidity boost from foreign investors, depth as well as breadth of the market will increase and internal liquidity will receive a major push as confidence increases amongst local investors. Overall, the UAE is likely to see a one-time inflow of approximately $440 million from passive funds tracking the MSCI Emerging Markets Index, given the country’s pro-forma weight of around 0.6 per cent in the Index and, according to Fund Tracker EPFR, the total size of $72 billion of passive funds tracking the MSCI Emerging Markets index. Presence of sophisticated investors allocating to constituents of MSCI’s Emerging Market Indices will also encourage the local stock exchanges, financial market intermediaries and relevant regulatory authorities to develop innovative and more sophisticated product offerings in order to remain in line with their global counterparts. Moreover, to remain competitive in the global emerging markets’ landscape, there will be a need to offer asset class diversification by providing an alternative to conventional asset classes in the form of hedge funds as well as derivatives and structured products.

There will likely be an increase in the number of listed stocks as private companies have an incentive to list; incentive in the form of greater recognition across the globe. This not only will increase the size of the market, but will also add to diversity among the existing asset mix. Large companies that are already listed will be tempted to increase free-float in order to qualify for inclusion into the MSCI Emerging Markets Index — this increase in free-float will inevitably result in increased transparency in company operations which would, as a result, further improve market efficiency.

For countries classified as Emerging Markets, MSCI requires that the efficiency of the operational framework be good and tested. Among others, a key requirement of an efficient operational framework is timely dissemination of all stock market information in English to all market participants, which should bring further improvement in market efficiency.

Lastly, on the regulatory front, this status upgrade will continue the UAE government’s successful trend to further push ahead and liberalise access to its financial markets by raising ownership limits for investors and adopting flexible legislative and regulatory frameworks, which is one of the key ingredients of efficiency in any market.

Dalma Capital Management Limited is a DFSA regulated asset manager operating in the DIFC. The company’s core business is hedge fund management. Zachary Cefaratti is a risk officer at Dalma Capital Management Limited. Views expressed by him are his own and do not reflect the newspaper’s policy.

Zachary Cefaratti - Khaleej Times