Confidence is the glue that sticks capital markets together. But investor confidence has dwindled to crisis levels and local markets have nearly screeched to a halt. While the US S&P500 Index was hit hard, with stocks crashing by 38.6 per cent last year, the UAE was hit harder. The Shuaa Capital UAE Index was down 66 per cent although earnings growth was estimated at 20 per cent last year. What can we make of this?
Of course, the global financial crisis has taken its toll on our market. However, many investors rightly attribute the lack of corporate transparency and disclosure, as well as companies "managing" their earnings, to the larger share price falls and increased volatility in the UAE markets than on western exchanges. This has also served to decouple company earnings from valuations. Many issuers, particularly in the UAE, should now be more motivated to restore investor confidence by overcoming the reluctance to provide transparent information. Convinced by a combination of shareholder scrutiny, increased competition for capital and adverse press coverage, these companies, once notorious for their indifferent attitude towards investors during the bull market, are changing their tune.
There might be light at the end of the tunnel if issuers, intermediaries and investors - both retail and institutional - can find common ground and work together to leave the crisis of confidence behind them. There are three things the market can do. First, a good start would be to agree that international investors are not always the bad boys. When companies, which needed growth capital, were cheerfully flogging new shares, they were welcome. When these investors started asking some very intelligent questions about bubbling property prices, the first signs of economic slowdown, and potentially lower earnings as a result of falling oil prices, they were shown to the door. Nobody expected that local investors would follow suit.
The high proportion of short-term investors with "hot money" who were active during the most recent market cycle can be attributed to the fact that the market was "hot". These investors were prepared to take high risks for high returns. The long-term investors, with lower risk appetite, are still here, albeit on a lower scale. They were forced to move significant portions of their portfolios into cash during the crash. Today, they need to find new investment opportunities to generate returns. Naturally, these investors are looking at the GCC markets. This also became apparent during the recent Shuaa Capital investor conference in London where Saudi Arabian companies attracted about 100 of the top international institutional investors. If they return to the UAE markets, perhaps local investors will feel more comfortable, too.
Second, central to the recovery in confidence will be the implementation of government reforms and policies. This should include regulating margin lending to retail investors, enacting a law that either allows or prohibits short-selling to foster clarity on the issue and digging deeper into the way that companies report in their financial statements. Some of these topics have already been addressed but require a more active approach to boost accountability, transparency and disclosure.
The US$4.4 billion (Dh16.16bn) capital injection into Abu Dhabi banks is an important step by the Government to ensure confidence in Abu Dhabi's financial institutions. Recently, the Central Bank also announced unprecedented plans to scrutinise the financial statements of banks. It has sent a clear signal to the market. The Government and the regulator are serious about investor protection and restoring market confidence. Perhaps as a next step the regulators could also lend some advice to the chief executives who are either unable to provide information for investors or still refuse to do so.
Finally, and perhaps most importantly, responsiveness to the domestic, regional and international investment community is something that companies cannot ignore. They need to understand that investors cannot evaluate what they cannot see. Investors require reliable information as a consistent measure to gauge corporate performance and progress because the prerequisite for making intelligent investment decisions is information.
Those investors who are able to correctly assess markets on the basis of reliable, timely and accurate information, improve their chances of successfully conducting securities transactions. Companies must disclose not just what they want to disclose, but also what investors need to know. Most investors will put a higher risk premium on stocks that lag behind on transparency and will pay a premium for those that disclose fully.
Going forward, it is possible that institutional investors, who are under enormous pressure to maximise returns, will invest only in companies that can assure them of their best intentions to provide all the information they require, both in good and bad times. Foreign capital will flow to companies that are able to restore investor confidence by employing international best practice in their investor relations.
It will take strong business leaders to make investor relations a priority, reinvigorating an environment of trust and credibility. If they can do this, they can encourage an appreciation among the investment community at large that transparency on bad results is better than providing no results. Only by promoting these values across companies and making it clear to investors that these values are important will the market be able to overcome its legacy issues, restore investor confidence and revive both stock markets and the economy. If not, the light at the end of the tunnel may be the oncoming train that will hit the markets and the economy even harder.
Oliver Schutzmann is head of investor relations and corporate communications at Shuaa Capital in Dubai. email@example.com