The UAE has outperformed emerging-market stocks this year as the country's exclusion from the MSCI Emerging Markets Index has shielded it from a heavy sell-off fuelled by the euro-zone crisis.
But a strong resurgence expected in emerging markets means there are still compelling reasons for the UAE to join the index, say analysts.
"We have largely been immune this year from some of the problems in play in the rest of the world," said Tarek Lofty, the head of asset management at Arqaam Capital. "Our markets also witnessed a lower level of activity and participation, in contrast to emerging and global markets."
The Abu Dhabi Securities Exchange General Index is down 11.6 per cent since January, while the Dubai Financial Market General Index is down 16.9 per cent in the same period.
But the loss has been greater on the MSCI Emerging Markets Index, which is down 19.3 per cent.
MSCI, whose stock indexes are tracked by fund managers controlling about US$3 trillion (Dh11.01tn) of assets, this month delayed a decision on whether to upgrade the country to emerging-market status. The UAE is classified as a frontier market, considered riskier by global investors.
Emerging-market stocks fell for a fourth day yesterday as the index fell to its longest losing streak in two weeks. Investors have been concerned the ongoing euro-zone debt crisis and the fiscal deadlock in the US earlier in the year will choke off signs of more robust growth in developing markets. China and other emerging nations rely on consumer demand in the developed world to buy their goods and services.
Instead, UAE markets have been steered more by local investors concerned about regional worries closer to home such as the unrest in parts of the Middle East and Dubai's debt problems.
Such concerns, combined with an uncertain global economic backdrop, discouraged trading activity and led to low levels of liquidity.
Mr Lofty said emerging markets were still tipped to rebound quickly.
"If you compare emerging markets versus developed markets, there are still far more growth opportunities going forward," he said.
"Capital will continue to flow towards emerging markets, whether it's Latin America, Asia or the Middle East."
There was still a "rationale" for joining the emerging market index, said Saleem Khokhar, the head of equities at National Bank of Abu Dhabi.
"Local companies will have much better research coverage and develop stronger reporting and investor relations practices," he said. "It's a natural development for us to move out of frontier status."
The challenge for the UAE is to now ensure it can secure the promotion when MSCI's next review takes place in six months' time.
The compiler blamed flaws in the UAE's delivery-versus-payment system, a mechanism that transfers payment at the same time as a stock is bought or sold.
But with almost all of the criteria required by MSCI met, low trading volumes are believed to have contributed to the failure to gain an upgrade.
Markets have dipped close to record lows at times and trading values have been a tenth of the level of three years ago.
