MSCI: A rejection in disguise?

Posted on July 18, 2011


Will the UAE and Qatar bourses continue to depend only on local inflows?

In what turned out to be a bit of an anti-climax after expectations had been built pretty high, Morgan Stanley Capital International “extended” for another six months its decision on a potential upgrade of the UAE and Qatar stock markets from frontier to emerging markets status.

This is an unusual move for the global index provider; in the past, it has simply said yes or no to an upgrade. In MSCI’s own words: “The 2011 review period for the potential reclassification of the MSCI Qatar Index and the MSCI UAE Index from Frontier Market to Emerging Market status has been extended to December 2011 in order to give additional time for market participants to assess the impact of the recent positive changes implemented in these two markets.”

One of the key changes is the shift to a delivery-versus-payment, or DvP, system of trading, which was introduced earlier this year. Does that mean an upgrade is highly likely in December if the market participants see significant operational value in DvP? Citibank analysts seem to think so. Read our top story pick for this week.There are some implications to MSCI’s decision that bear a second look. Foremost, does the “extension” mean that UAE and Qatar equity markets – and, by extension, those of the Gulf nations – will continue to depend mainly on internal investors for trade volume? Will all the cash that global institutions kept waiting in the wings on expectations of an upgrade now be deployed elsewhere? Or will some of it find its way to the Gulf on expectations of a December upgrade? Will the UAE and Qatar consider more options to bring their markets more in line with MSCI Emerging expectations?

The UAE has indicated, for instance, that foreign ownership limits are not under review. EFG Hermes believes the foreign ownership limits in Qatar would need to be reviewed in order for its markets to be upgraded. DFM has, on the other hand, accredited the first brokerage firm in the UAE to offer margin trading, a key part of a market enhancement plan.

The bottom line, however, is that these stock markets are trading at price-to-earnings ratios that are considered reasonably attractive, especially the UAE. The Dubai Financial Market is at a PE of just under 11, the same level as last year. Qatar Exchange’s PE is under 15. The DFM index has lost about 8.5% in the year to date while Qatar has dropped 5.6%. In terms of fundamental and technical attraction, both markets would rate higher than some of their peers. Emerging market investors would probably be ready for a quick response come December.

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Posted in: Markets