More UAE brokerages are poised to shut down in the first quarter of this year if volumes do not improve.
Troubled brokerages face battle for survival
Fears are mounting that many more brokerages in the UAE will close within weeks as brokers forecast lower trading activity in the first quarter, even after volumes almost halved last year.
"This quarter will be make or break for many brokerages," said Mohammed Ali Yasin, the chief investment officer at CAPM Investment, which owns Asayel Shares and Bonds brokerage. "The coming days are going to be very, very challenging."
Investor sentiment, dampened by the Arab Spring and Europe's debt crisis, triggered the closure of 45 brokerages last year.
Fifty-eight brokerages are still operating in the Emirates, down from 103 at the beginning of last year, according to trading reports published by the Abu Dhabi Securities Exchange and Dubai Financial Market.
The value of equities traded by UAE brokerages fell 45 per cent to Dh57 billion (US$15.51bn) last year, when compared with the year earlier period.
The figures illustrate the fight among brokers for slices of a pie that is shrinking because of declining trading volumes. Local investment banks, such as Rasmala and Shuaa Capital, last year ceased to offer retail brokerage services to cut costs, focusing exclusively on institutional clients.
Many foreign investment banks have also restructured their operations in the UAE.
Germany's Deutsche Bank recently moved its head of equity capital markets back to London from Dubai. Nomura, based in Tokyo, closed its Dubai equity research unit, and the UK's HSBC has shut its retail equity brokerage unit in the Emirates.
"When brokerages opened in the past, volumes would increase as brokers traded some of their own money to encourage clients to invest," said Nabil Farhat, a partner at Al Fajer Securities in Abu Dhabi. "With every brokerage that shuts down today, liquidity dries up further as relationships with clients are built on trust. Many investors are not comfortable with dealing with new brokers, even if those companies are still in operation."
The UAE's stock-exchange regulator, the Securities and Commodities Authority, developed guidelines in November to encourage cash-strapped brokerages to merge amid depressed market conditions.
Independent or family-run brokerages, however, have not been enticed to merge with other ailing independent companies. Many that have approached brokerage arms of local banks as potential lifelines have been unsuccessful in merger talks, Mr Farhat said.
"There is a war between the independent brokerages and the brokerage arm of local banks," Mr Farhat said.
"We have approached local banks with no avail," he said. "It seems their policy is to wait out the challenging environment as independent brokerages foreclose and then reap the benefit of being the only ones left in the market.
"If several independent brokerages merged with the brokerage arm of a local bank, the majority of the accounts would be transferred to the new entity,instead of losing more and more participants in the market," Mr Farhat said.
"Most brokerages are down to their bare bones in terms of austerity measures and cutting expenses," Mr Yasin said. "Under current conditions, brokerage companies need 7 per cent market share to break even. Anyone who is doing less than that is burning cash."
The UAE is under review for an upgrade to "emerging market" status in June by the index compiler MSCI. The country is currently classified as a "frontier market".
India's government authorities yesterday said foreign retail investors will soon be able to buy shares in Indian companies, in an effort to boost trading on the Bombay Stock Exchange (BSE). The country's benchmark Sensex dropped 25 per cent last year as local retail and foreign institutional investors shed their holdings in Indian stocks after Europe's debt crisis deepened.
The decision was made "to widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market", the government in Delhi said.
Foreign retail investors will be able to make trades on the BSE from January 15, rather than investing indirectly through mutual funds.
"This is very good news for India," said Pradeep Unni, a senior relationship manager at Richcomm Global Services in Dubai. "The additional funds will have a twofold effect: increase investment in the stock market and the country's economy; and help with the appreciation of the currency."
The rupee is ranked the third-worst performing currency for last year.