After the official announcement by the Government that it intends to create an official stock market, we look ahead to the opportunites and challenges
Long touted as the harbinger of change for the UAE economy, the Emirates stock market is today, an officially announced venture. Although still only on the drawing board, the very fact that it’s imminent creation has been announced is seen in industry circles as being a confirmation of the long awaited need for the growth of capital markets in the country.
And yet the Emirates Stock Market is an enigma. For this a country where the unofficial stock market, whose trades are mostly conducted over the telephone or in the privacy of the majlis, turned over an estimated US$ 190 million in 1995 alone. This figure may not make the headlines in The Wall Street Journal. But it is potential of such a market, and the need to ensure fiscal discipline within it, that fuels the drive for an official bourse.
In its present unofficial state most things about the market are a matter of estimate rather than record. Private deals are done all the time, but licensed stockbrokers are estimated to handle a much smaller percentage of trades that there counterparts on other exchanges.
“Having an unofficial market means that there is a possibility of lax controls in who acts as a broker,” explains Zuhair Kiswani of Al Sharhan for Stocks and Shares, one of the UAE’s few licensed stock brokers. According to him, although stockbrokers licenses are controlled, it is only when an official bourse is established that all the trades will be channeled through the brokers.
More importantly, the setting up of an official market is expected to encourage an expansion in the size of the market, both in terms of the number of trades and also number of investors. One of the key factors for the limited size of the present market is said to be the limited trading behaviors of investors. “People here generally buy for dividends only,” explains Kiswani. “That means that once someone buys certain shares, they are very likely to hold on to them rather that trade them when the price is right.”
Not only does this reduce the number of floating shares in the market, it also prevents any significant movement in their prices. “You have to take into account the mentality of the investors here,” explains Khalid Kalban, general manager of Dubai Investments Company. “ They buy to keep, especially among the big families and the older generation. But this too, will slowly change.”
But this behavior may be far more sensible than some may realize. “People think that investing in equity is all about stock pick and trade,” explains Osmond Plummer, vice president of the international private banking arm of Lloyd’s Bank. “If that strategy works, then you are successful. Sometimes though, it is better to sit on a stock for some time and let the dividends roll in.”
An extension of this is the fact that here, there is a very strong aversion to risk taking. To some extent, this is related to the experience of the crash of the Souk Al Manakh in Kuwait, where many observers said wild speculation was a major contributor to the market’s collapse. However, argues Kiswani, extreme caution is as detrimental to the development of a stock exchange speculation?
With the development of a formal bourse, things however are expected to change, including the opening up of avenues for organized private firms to go public and expand. This could possibly becomes a more significant aspect, as the WTO rules permitting open competition come into effect and local firms require capital from sources less expensive than bank borrowing.
There are also serious questions to be answered bout the structure of any exchange that will be set up here, especially about who will be permitted to participate. Most insiders believe that if the exchange is to be a translation of the real economy, it must allow foreign investment. At present, the only such investment technically possible is for foreign investors to hold a 49% share of the company, and have a local partner who holds 51% of the company’s equity. “An official stock exchange would make for more active trading,” says Kalban.
“Personally, I’m thinking o Dubai as an international market; a major performer. If it is to become this, then you have to allow foreign institutions to invest.”
“Look at the way Hong Kong and Taiwan did it. They opened up slowly and now they are international players,” he says. “What we have to do here is select the best system applicable to the market. For the Emirates, an automated system would be best, removing the obstacles of location and distance.”
Kiswani for his part agrees with that view on automation. “Computerisation will allow us to leapfrog into the modern information age and eliminate any need for an investor to be in a specific building to complete a transaction.”
Another of the issues facing the proposed exchange is the limited spectrum of listed firms. “The majority of the shares available currently are those from service companies,” says Kiswani. “It would certainly help if a wider variety of firms were quoted.” He cites the example of the Muscat exchange, which already has a quite broad spectrum of firms including manufacturing, power, food, mills, feedstock, livestock, fisheries, banks, insurers and hotels. “Such diversification is not just so that the investors have a choice of shares,” explains one observer; “It also ensures that the entire exchange is not dependant on the fortunes of any particular industry.”
The question of foreign participation also comes up when considering the physical setting-up and regulating of an exchange. Setting up one indigenously, which is capable of contending with and regulating the complex machinations of stock markets, could prove to be a difficult proposition. Kiswani however, is more optimistic: “Once they establish a stock market, the law will control the behavior.”
There are high expectations among many here for the performance of an exchange. To some analysts, that could be misleading. “Establishing an exchange does not mean that the entire economy is going to be radically transformed; or invigorated” commented one. The move towards an official exchange should also be accompanied by encouraging privatization, where applicable, of government firms.
Private firms also stand to gain in the wake of such moves. Their ability to consolidate was recently demonstrated when the Rostamani Group took a major stake in the Jumbo Group. This synergism will also facilitate the strengthening of local firms by providing a mechanism for bringing in capital when needed.
Conversely, it means that any private firm going in for such expansion will have to be more open about their finances, management and growth potential. The preparedness of companies and trading groups to open themselves up to closer scrutiny, will above all these provide the answer to the million-dollar question? Can a public stock exchange become a success here?