When things don't go according to plan and as a result someone is hurt, be it physical or financial, human nature looks for someone or something else to blame. When the Gulf stock markets succumbed to the impact of the global "credit crunch" in the second half of last year, that "someone" or "something" was foreign investors. It is true that at the same time as stock markets in the UAE and wider Gulf region began to fall, foreign investors were selling their shares. But why?
There are two answers to this. First, during a time of such financial stress, investors will often have to repatriate their money to cover positions at home. Next, a considerable amount of speculative money flooded into the UAE markets in 2007 and early last year in expectations of the de-pegging of the dirham from the US dollar. When this began to look unlikely, the speculative money left. But the timing was unfortunate.
If only foreign investors were to blame for the stock market decline, how would we explain the fall in the Saudi market, the GCC's largest, which until very recently did not allow any foreign investment? Even at the recent height of the GCC markets last July, only 9 per cent of the total value of shares on the Abu Dhabi Securities Exchange (ADX), for example, was owned by non-GCC investors. So what else was to blame?
In the same period of time, property values began to fall, banking liquidity dried up and loans were being called in. Many investors who had borrowed from the banks to invest in the stock market - a risky practice in itself - had to sell. Others who had loans to pay and commitments to fund could no longer go to their local bank for assistance. For a while, the stock market became the only source of ready cash for those in immediate need.
The answer, therefore, was the lack of banking liquidity, not just the reduction in foreign shareholders. It's all very well to say that it's not just foreign investors who were to blame for the markets falling. But the question then arises: why would a country with the financial resources of the UAE need investment from outside in the first place? The answer is that just as other sectors of the economy can benefit from working with outside investment and expertise, so too the UAE capital markets can benefit from opening up more to committed, long-term foreign investors such as pension funds and other big institutional investors.
As the Government has acted to diversify its economy, so the stock markets and related entities must act to diversify their investor base. Established, long-term, large investors would bring more stability to the UAE stock markets, which have always been heavily dominated by individual investors. Many of these investors are day traders who tend to invest according to sentiment, rather than analysis. Where large, stable institutions invest, more transparency by listed companies and more widespread and in-depth research will follow.
And with more transparency comes better corporate governance standards, more analysis, more appropriate stock valuations and potentially higher share values and more protection - which will also benefit the smaller, individual investors. While the ADX has obviously been impacted by recent events, I am confident that once the world markets begin to pick up, this market will recover much more quickly than others, because its companies are rooted in an economy that has a particularly strong economic outlook. I know I am not alone in this view.
The Abu Dhabi Government has published a comprehensive road map for economic development - Economic Vision 2030 - which clearly spells out the need for financial markets to become the key financiers of economic sectors and projects. It places great emphasis on the importance of diversification, moving away from a currently equity-dominated market to the development of different types of instruments. This deeper market will have even more appeal to foreign investors.
Along with a commitment to widen the securities available on the market is a drive to encourage more companies, particularly family companies, to list - further diversifying the sectors available. One of the concerns that stock market observers have, however, is whether too many initial public offerings or new financial instruments will drain liquidity from the market. This risk can be mitigated if those companies are actively open to having foreign institutional, as well as local, investors.
I am confident the demand will be there. Prior to the credit crunch impacting world markets in a far more dramatic way than many observers had predicted, many of the listed companies that did allow foreign investment were almost up to their limit, a clear sign of foreign interest. And when it does pick up again, it could pick up very quickly. The ADX emphasises attracting large, committed, long-term foreign investors because we believe they have a stabilising impact on the market, as well as making it more sophisticated.
But how can listed companies attract this sort of investor, rather than leave themselves at the mercy of speculators? Currently, most listed companies may find this difficult, but by introducing investor relations practices that are common in developed markets - such as employing a dedicated investor relations function, and marketing themselves to specific foreign institutions - they can, to a large extent, attract the types of shareholders that will benefit the company in the long term, instead of being at the mercy of speculators that can exacerbate short-term fluctuations in share prices. Tom Healy is the chief executive of the Abu Dhabi Securities Exchange