Jeff Singer details recommendations to move markets forward.
Government entity IPOs a good idea
Jeff Singer, the chief executive of Nasdaq Dubai, details recommendations to move markets forward.
The rest of my recommendations, below, are distilled from conversations with many interested people from different backgrounds and nationalities.
The most overwhelmingly recommended suggestion I have received is that the UAE needs to float more of its government and quasi-government companies. Both Abu Dhabi and Dubai have great companies that local, regional and international investors desire to buy. The governments could float as little as 25 per cent of each at first and more later, when market and country valuations improve. Many government companies are seen as stable and have solid business models. They may not generate valuations seen in 2008, but they will generate valuations that are in line with those in the United States, London or Hong Kong. Successful IPOs [initial public offerings] will signal to family and smaller companies that the government stands behind the capital market and is committed to support it long term.
In addition, by raising equity capital, the UAE would be staying out of further debt. While the cost of debt is sometimes cheaper on paper as a result of the UAE's oil reserves, debt comes at a horrible price if growth does not materialise as planned or unexpected destabilising events occur. In addition, these companies should come from diversified sectors so that investors can take part in the entire UAE growth story and not just construction and finance.
This will also reduce share price volatility, further allowing investors to participate at a lower cost per transaction.
As mentioned, liquidity begets liquidity and this market is dominated by local retail liquidity. However, the UAE is an open country that has strong relationships with all the developed nations of the world; as such, international firms desire to invest in this country as familiarity is high.
The stock markets need to adapt to allow international investors ease of access, including fewer restrictions on foreign ownership, together with the ability to hedge their positions and employ sophisticated risk management. The regulatory framework should inspire confidence.
Much has been discussed regarding a possible MSCI market upgrade from "frontier" to "emerging market" status. This conversation needs to continue. Short selling, stock lending and borrowing, proper clearing from a central clearing house, sophisticated delivery-versus-payment (DvP) settlement, Swift messaging, and remote access for international brokers are elements of a sophisticated market that international investors require. If these elements are missing, investors will be cautious about coming in and staying.
The status of being classified as an emerging market would only bring lasting benefit if these underlying operational changes were made. If we make these regulatory and operational changes and receive the MSCI upgrade, then I think liquidity will come into the market.
Create a local buy-side investor pool to support the market. In small countries where institutional wealth exists (Hong Kong, Singapore), creative governments have set up retirement schemes with matched contributions to create a pool of money for their people when they retire. A portion of these contributions are then invested in the local markets by local institutional investors.
The existence of these pools of stable local funds makes retail and foreign investors more confident about investing, knowing that the market is supported by the government and protected with superior regulation because it is the people's retirement monies that are invested. The UAE authorities could also create new funds to invest in high quality private companies and then take these to market with an IPO.
The task force should ensure UAE issuers are aware this country possesses a capital market infrastructure of such high quality they can list their IPOs and debt here with full confidence.
They would then cease to take their listings outside the region and build up this country's markets instead. Once a country outsources its capital markets, it is very difficult to bring them back home. This amounts to a lost opportunity for local job creation and economic expansion.
"Good regulation is good business," says the Nasdaq Dubai board member Ed Knight. This phrase can be taken in a number of ways in the UAE.
First, sophisticated investors require that the markets they invest in are seen to practice the highest standards of corporate governance. This means issuers are seen to disclose all relevant information on a timely basis; that brokers are seen to adhere to trading rules; that the exchanges are seen to conduct market operations that are fair and orderly; and all participants act in good faith when listing, trading and settling securities.
Second, regulators need to keep abreast of changing global trends, economic conditions, and technology advances. Regulators need to adapt to all these changes in a timely manner that improves market performance. Delaying necessary regulatory changes or not leading on best operational practices would make investing locally seem unnecessarily risky.
When good regulation is in place, the trust necessary for markets to operate exists and companies and economies flourish.