Nasdaq Dubai's chief executive Jeff Singer explains the challenges that the UAE's capital market faces.
The challenges we face in the UAE capital market are substantial.
Market valuations are depressed. Currently UAE stocks are trading at price/earnings multiples of 8 or 9. This is down from multiples a few years ago in the high teens. These ratios reflect the weakness of the property and financial sectors as well as overall UAE and regional political and economic factors.
The stock exchanges in the UAE suffer from a lack of industry diversification beyond property and finance. Volumes will be depressed until those sectors rebound, which looks unlikely to happen soon.
Liquidity begets liquidity; momentum is critical. In the last few weeks liquidity has picked up but is still relatively low. Investors are still reluctant to come into the market. Just as more investors jump into a rising market, they also shun a downward trend and create an opposite, ruinous effect
The Arab region is dependent on Europe for about 50 per cent of its overall external funding. As the European debt crisis rumbles on, the UAE will come under greater strain as fewer investment funds will show interest in this region.
The main capital market investors in the UAE are retail investors. Their reasons for participating range from speculation and day trading to pure, long-term investments. But retail investors alone do not provide a stable foundation for a company's share price. Without substantial local institutional participation, the markets are unnecessarily volatile and therefore perceived as "dangerous".
Market regulation needs to be perceived as timely, well-drafted, and flexible. Market participants need to be sure that regulators are clear about the purpose and intent of their rules and that they will enforce those rules. If unintended consequences occur, the regulators need to adapt quickly - especially in an unpredictable "frontier" market, where flexibility is critical.
Although the UAE is an international financial centre with leading infrastructure and a global banking presence, some UAE equity and debt issuers are overlooking the stock exchanges and prefer to list instead outside the country. Dubai is a centre of expertise for advice, lead management and custody for equity and debt products; however NMC [a healthcare firm in Abu Dhabi] plans an initial public offering in Europe on the London Stock Exchange. In addition, some local debt issuers choose to list on western markets. In the past few weeks Tamweel issued a US$300 million (Dh1.1 billion) sukuk in Dublin, and First Gulf Bank issued a $500m sukuk in London.