Investors woke yesterday expecting a decision on whether the UAE qualifies as an "emerging market" - only to be disappointed to find the answer had been delayed a further six months.
MSCI, a company based in the US that compiles indexes followed by fund managers around the world, said it would defer a final decision on whether the UAE should be raised to emerging-market status from "frontier" until December.
The news dismayed investors, who responded by selling off Dubai shares, which dropped almost 2 per cent. In Abu Dhabi, shares remained unchanged.
The result was an anti-climax after a final verdict had been widely anticipated for months by bourse officials, local companies and investors, with many hoping an upgrade would attract hundreds of millions of dollars in foreign investment.
"I was surprised. I thought it was going to be a yes or no. I didn't think it was going to be a wait," said Jeff Singer, the chief executive of Nasdaq Dubai.
But he said the postponement was a "fair decision because there are still things to do" for the UAE to qualify as an emerging market.
The country's limits on foreign ownership in listed companies, apart from in its free zones, and a lack of experience in using a key settlement system were cited by MSCI as the top reasons for a delay.
"We are focusing still on those two aspects," said Remy Briand, MSCI's managing director and global head of index research.
The sell-off at the Dubai Financial Market (DFM) was the exchange's biggest one-day loss in a month.
"Look at everything," said one investor pointing to the stocks on the trading board as markets opened. "Dyed red."
In its annual review last year, MSCI said local stock markets needed to implement an internationally recognised settlement system, called delivery-versus payment (DvP), in which payment is made the same day securities are delivered.
The Abu Dhabi Securities Exchange and DFM announced in recent months the necessary procedures were in place, but brokerages have struggled to implement the system. Nasdaq Dubai postponed implementation until next month.
Mr Briand said "solving a problem on paper" did not necessarily signal the markets were ready to use the system successfully.
"Very few market participants have experienced operating the new system and there are already some questions on certain aspects of DvP that need to be clarified," he said.
MSCI also said caps on foreign ownership of local stocks remained a hindrance.
At present, outside the free zones, the UAE limits foreign ownership to 49 per cent of listed companies but many of the biggest firms, including the telecommunications giant Etisalat, do not allow foreigners to own any shares.
Lifting foreign ownership limits would be more straightforward because it does not require technical changes, Mr Singer said.
"It would be the easiest to change because it doesn't require technology. But to change the foreign ownership limits you've got to have priority from the highest levels in the UAE."
Government officials have said in the past week there were no plans to raise the limits.
Qatar's frontier market status will also be reviewed in December. In a strongly-worded statement on its website, MSCI said the country's strict 25 per cent cap on foreign ownership was effectively making equities "quasi-uninvestable".
But Qatar Exchange (QE) said the decision did not reflect the country's economy.
"The economy of Qatar is strong and companies listed on the QE are performing very well and attracting local and foreign investors alike," the bourse said.
The UAE has missed out on MSCI reclassifications since 2009, when the Emirates was first put on its watch-list for a potential upgrading.
* with additional reporting by Hadeel Al Sayegh and Gregor Stuart Hunter