The authorities are rightly proud of last year’s upgrade of the UAE to emerging market by MSCI. Now the country should set its sights on the next visionary milestone: to become a developed market. There are good reasons to think this is possible within the next decade.
The UAE is the de facto capital of the Arab world. It is the trading, travel, logistics and banking centre of a regional market that is home to 350 million people. It is a diplomatic and defence powerhouse. It is the place most Arabs want to live, and the top tourist destination. It can and should aspire to become the benchmark and market of choice.
So how would we get there?
You might think the major constraints would be tangible factors such as population, the size and sustainability of the economy or the land mass. But you would be wrong.
Measured by GDP, the UAE’s US$400 billion economy is already larger than many developed markets, such as Denmark ($330bn) or New Zealand ($182bn). The UAE’s stock markets, with more than $200bn in market capitalisation, are bigger than Ireland’s ($150bn) and Austria’s ($96bn) – both developed markets.
The UAE broadly fulfils the MSCI’s criteria for market size, liquidity and economic development. The criteria that is the big obstacle for the UAE to become a developed market is accessibility. One of the sub-criteria of accessibility is information flow.
For the same reason, rating agencies whisper, there is no triple-A rated sovereign in the Arabian Gulf states, even though many of the countries are flooded with cash and have some the highest capital ratios in the world. What holds back this region is not a lack of size or resources, but transparency and disclosure.
Regulators in the UAE have taken important steps towards greater disclosure. A few weeks ago, the Securities and Commodities Authority issued the first investor relations guidelines for listed companies, supporting legislation passed last year that compels all listed companies to have a dedicated investor relations function. The guidelines include specific reporting and disclosure standards such as the information companies are required to post on their investor relations website. This is a positive sign.
Intelligent investors buy only what they can see and understand. If we aspire to compete with the other great trading blocs of the world, our companies need to start operating in these markets by providing more timely and accurate disclosure of information to the global investment community.
Regulations are part of the solution. But companies themselves need to change the way they interact with investors to gain greater levels of understanding and confidence. The benefits for the economy will be substantial. Markets that adhere to higher standards have higher valuations and higher volumes, which attract greater global capital flows.
Most institutional investors, both regional and international, need to be able to guarantee that they can sell out of a position in a matter of days before they take a plunge. Liquidity in some UAE companies is still so light that it could take months to unwind a substantial investment position in a single stock, and many companies remain untouched because of low trading volumes. It is a truism that stock markets are competitive places, and companies need to engage investors on a continuous basis to maintain liquidity and value.
To accelerate the pace of change, companies should seek to go beyond the minimum standards required by the regulator and do a number of things: take time to understand who is trading their stock and why; develop a clearly articulated strategy and investment case; convince investors that the management team will deliver on the strategy; and create investor relations programme that is deserving of investors’ trust.
Oliver Schutzmann is the chief executive of the UAE investor relations company Iridium
