A possible upgrade for the UAE to emerging market status may not be the good news most investors have been expecting, says the veteran emerging markets investor Mark Mobius.
Stock exchanges in the country have been working towards inclusion in MSCI's emerging markets index to try to raise the profile of locally traded stocks.
"In reality it won't increase investments. It might actually decrease investments because you become a small fish in a big pond," said Mr Mobius, who oversees more than US$54 billion (Dh198.33bn) as the executive chairman of Templeton Emerging Markets Group.
Although the UAE and Qatar have a "good chance" of an upgrade from the index compiler, the inclusion "is not too material" for the fund, he said.
The UAE is seeking to secure an upgrade from frontier markets status at MSCI, which is expected to revisit the assessment in June.
"The weighting of these countries will be relatively small so in some ways it's better for them to be in the frontier category," Mr Mobius said at a roundtable in Dubai.
Only 3.3 per cent of UAE stocks are held by foreign investors, a research note from AlRamz Securities showed, a factor that some market experts say can be resolved only by an upgrade.
"Clearly, gaining emerging market status will lift the local market on the back of a wave of foreign money," said Daniel Broby, the chief investment officer at Silk Invest in London, who added the MSCI emerging market index was tracked by investors with an estimated $5bn in assets.
"Dubai debt will be relegated to yesterday's story," Mr Broby said.
Six of the seven GCC bourses are classified as frontier, a category that typically applies to less developed, more volatile financial markets from which most international fund mangers shy away. Saudi Arabia is not classified.
Deep Sitlani, who covers emerging markets for Commerzbank in Dubai, said the UAE could attract about $2.5bn in foreign investment if it became an emerging market.
"The pool of funds getting directed to emerging markets is very large, whereas funds still don't have an appetite for frontier markets," Mr Sitlani said.
