Stocks leapt yesterday after the UAE succeeded in a six-year effort to gain entry to the MSCI Emerging Market Index.
The index provider upgraded the UAE and Qatar to "emerging" status early yesterday morning, in a move that HSBC expects will bring about US$800 million worth of investment to the two countries' exchanges after they are included next May.
Greece was downgraded to an "emerging market", becoming the first "developed" market ever to lose that status. Both the UAE and Qatar will outrank Greece in the new index. Morocco slid from the Emerging Market Index to the Frontier Market Index because of persistent liquidity issues.
The MSCI Emerging Markets Index, which tracks $7.3 trillion worth of equities around the world, is considered the A-list of growth markets and includes countries such as China, Brazil and India.
"It has been a long journey, but we've finally arrived", said Georges Elhedery, HSBC's regional head of global markets. "Today's decision firmly establishes the region on the emerging markets growth map in the minds of global institutional investors."
The bank expects equity inflows of $420m for Qatar and $370m for the UAE, with both markets expected to rank above the Czech Republic, Egypt and Hungary in the index.
The Dubai Financial Market General Index rose 1.5 per cent to 2,395.65 points. The Abu Dhabi Securities Exchange General Index jumped 2.6 per cent to 3,661.09, the biggest intraday move since 2009.
The Qatar Exchange Index rallied 1.7 per cent to 9,517.95.
The upgrade would "crown the SCA's [Securities and Commodities Authority] sustained efforts as part of a comprehensive strategic plan, aimed at achieving greater development of the country's financial markets and boosting the national economy", said Sultan Al Mansouri, Minister of Economy and the regulator's chairman.
Exchange officials were quick to celebrate.
Essa Kazim, the chief executive of the Dubai Financial Market, said the upgrade was "overdue". Hamed Ali, the acting chief executive of Nasdaq Dubai, said the decision would help spur investment, "improving the already positive climate in the country's capital markets." And the ADX chief executive Rashed Al Baloushi said that the next step would be to prepare a strategy for obtaining "developed market" status, the highest rung on MSCI's ladder.
Banks moved to take advantage of the decision, with Finance House Securities announcing the launch of its new online trading platform.
But the night brought bad news for other Arab markets in North Africa. Morocco was downgraded and MSCI said it was also "closely monitoring the situation in Egypt" and might begin a review of its future in the Emerging Markets Index.
The DFM has soared 47.6 per cent so far this year, while the ADX has increased 39.1 per cent. The two are among the five best performing exchanges in the world this year.
How much the rally could continue after of the upgrade of the UAE's stocks was uncertain.
Banks say that institutional investors, such as pension funds and insurance companies, had been increasing their exposure to the UAE all year, meaning that a large amount of institutional capital was already invested here.
The upgrade would not mean significant changes in portfolio allocations for BlackRock, the world's biggest asset manager, said Sam Vecht, the head of the firm's emerging markets specialist team.
"We have been broadly positive on both of these countries for the last two years," he said. "While we welcome the move, it is unlikely to have any significant near-term effect on how we manage our client portfolios."
