Last Updated: Wed Jun 22, 2011 10:32 am (KSA) 07:32 am (GMT)

Investors will have to wait some more: MSCI delays UAE, Qatar market upgrade to ‘emerging markets’ status from ‘frontier’

UAE and Qatar market participants were met with an anticlimactic result in last night’s MCSI index decision to upgrade the Gulf stock markets. (File Photo)
UAE and Qatar market participants were met with an anticlimactic result in last night’s MCSI index decision to upgrade the Gulf stock markets. (File Photo)

As investors waited with baited breath to hear last night’s MSCI stock market decision for the United Arab Emirates and Qatar, the announcement came.

But after months of anticipation, market participants were left with an odd anticlimax.

Morgan Stanley Capital International, a global provider of investment decision support tools to investors, postponed its decision on a potential upgrade of the UAE and Qatar stock markets to “emerging markets” status for another six months.

The Gulf States are currently bracketed as “frontier” markets alongside financial lightweights such as Vietnam, Kenya and Slovenia.

An emerging markets upgrade would see the Gulf states join the classification some of the world's fastest growing economies, including India, China and Russia.

An upgrade is also likely to woo more global investors and fund managers into the UAE and Qatar markets, potentially boosting the fortunes of local listed firms.

MSCI said in a statement that it was extending the review period for the potential reclassification of the MSCI Qatar and the MSCI UAE indices until December 2011.

This is “in order to give additional time for market participants to assess recent enhancements implemented on the Qatari and Emirati markets,” the statement read.

The two Gulf States have already made several moves to meet the MSCI emerging market criteria. The UAE implemented the delivery versus payment (DvP) settlement system in its Dubai Financial Market and the Abu Dhabi Securities Exchange. Meanwhile the Qatar Exchange also recently moved to a DvP system.

MSCI said that the market needed more time to assess the impact of the new DvP models, adding that “few market participants have had the opportunity to make a full assessment yet.”

DvP is a key prerequisite to an emerging markets upgrade. It is a securities industry procedure which ensures securities are delivered and cash received on the same day. Usually, the payment is made to a bank, which in turn pays for the security.

But despite this, the MSCI said that Qatar would still have not been upgraded if the decision was made last night.

“Under current conditions the MSCI Qatar Index would not qualify for Emerging Markets,” the statement read.

The company said this was due to Qatar not meeting the MSCI’s stringent foreign ownership limits, citing Qatar’s “limited availability of shares to foreign investors.”

Qatar only allows 25 percent of foreign ownership shares in its listed companies, while the UAE allows up to 49 percent.

“This point has been more strongly voiced for the Qatari market as large companies, such as Industries Qatar, have almost reached their foreign ownership limit and became quasi‐uninvestable for foreign investors,” MCSI said.

The regional head of HSBC's securities services said that the delay of the decision was the best outcome for both markets.

"Under the current circumstances, this is possibly the best outcome for both UAE and Qatar,” Arindam Das said in an interview cited by Reuters.

“If MSCI had to make a decision now, they would not have been able to upgrade the markets," he added.

HSBC analysts have estimated that Qatar and UAE could receive inflows of $600 million should they be upgraded to the emerging category.

"I personally will be disappointed if markets react negatively to this announcement. I don't think investors in either market were expecting an upgrade so this is a favorable outcome," Mr. Das said.

(Eman El-Shenawi, a writer at Al Arabiya English, can be reached at: eman.elshenawi@mbc.net.)

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