U.A.E., Qatar May Allow Short-Selling for MSCI Upgrade, Revival of Volumes

The United Arab Emirates and Qatar may become the first Persian Gulf countries to allow short- selling as regulators seek to revive trading volumes and secure MSCI Inc.’s Emerging Markets status.

The implementation of short-selling is “in line with the efforts to upgrade the U.A.E. markets,” the country’s regulator said in an e-mailed response to questions. Qatar’s exchange has also signaled it will introduce short-selling and derivatives trading, in addition to raising the percentage of shares foreigners can own in a company to 49 percent from 25 percent.

“As these markets join the MSCI EM, more attention will be focused on them,” volumes will probably rise and the market will likely become more efficient, said Philippe Langham, who runs the $660 million Royal Bank of Canada Emerging Markets Fund in London. Langham doesn’t hold investments in the U.A.E. or Qatar and would consider buying stocks after an upgrade. “We would spend more time looking for attractive opportunities in any markets that look set for promotion.”

Gulf markets have struggled to revive trading volumes after the world’s worst recession since the Great Depression and a collapse in property prices in the region’s financial bellwether, Dubai. At the same time, inflows into emerging- market stock funds have surpassed $84.3 billion so far in 2010, putting them on course for a record year, according to Boston- based EPFR Global.

Short sellers borrow and sell an asset, hoping to profit by buying it back later for less.

‘Mitigating Risk’

MSCI classifies six of the Gulf’s seven bourses, including those in the U.A.E. and Qatar, as frontier markets, a designation that typically applies to economies and financial markets that are less developed than emerging markets. Saudi Arabia’s market is not categorized. MSCI indexes are tracked by investors with an estimated $5.2 trillion in assets, according to a May 26 report by Shinhan Investment Corp.

The index provider this June will revalue its assessment by examining, among others, economic development, trading volumes and market accessibility. MSCI this year cited the U.A.E. and Qatar’s dual account structures - segregated custody and trading accounts - as one of the reasons for their frontier market status and kept the countries under review for reclassification. MSCI declined to comment when contacted by Bloomberg.

“International investors with exposure to the region want to have the derivatives that will allow them to mitigate risk,” said Peter Gotke, vice president of depository receipts at Bank of New York Mellon Corp. “In the absence of derivatives, the introduction of short-selling would be welcomed by investors, and could be one way of arming themselves against that perceived risk or illiquidity.”

FTSE Ranking

FTSE Group became the first to categorize the U.A.E. as a secondary emerging market in September, helping attract part of the $3 trillion of funds that track the index compiler’s benchmarks. Shares of 21 companies including Emaar Properties PJSC were added to the FTSE’s Global Equity Index after the close on Sept. 17. FTSE classifies Qatar as a frontier market.

The U.A.E. indices will remain a secondary emerging market at FTSE for at least another year, according to Jonathan Cooper, FTSE’s managing director for the Middle East and Africa. “There are still challenges that need to be overcome and the U.A.E. will need some more time,” he said.

The volume of shares traded in Dubai and Abu Dhabi this year is less than half of what it was in 2009. It’s down 43 percent in Qatar and Saudi Arabia. Abu Dhabi-based Union National Bank PJSC was dropped from the MSCI Global Standard Indices after it failed to meet liquidity requirements, the index provider said on Dec. 6.

UNB’s Exclusion

“UNB is the fourth-largest bank in Abu Dhabi” and its deletion highlights the lack of volumes in U.A.E. markets, said Tarik El Mejjad, a London-based analyst at Nomura International Plc. “The low liquidity levels do not justify inclusion in the MSCI emerging markets index next year.”

The MSCI Emerging Markets Index has gained 13 percent so far this year, extending last year’s 75 percent rally, the biggest since data began in 1988. The MSCI Frontier Markets Index has increased 16 percent after rising 7 percent in 2009. Dubai’s benchmark index has lost 6.1 percent this year, even after rallying 16 percent in the second half. Abu Dhabi’s measure is up 0.7 percent and Qatar’s 26 percent.

Default Position

The U.A.E. regulator also expects to introduce Delivery Versus Payment and security lending and borrowing, both MSCI criteria, according to the Securities and Commodities Authority statement. Essa Kazim, chief executive officer of the Dubai Financial Market PJSC, said in September that DvP will be implemented by the end of the year.

DvP is a securities industry procedure in which payment for a security must be made when the security is delivered. Usually, the payment is made to a bank, which pays for the security.

“Although funds are not required to invest into every part of their benchmark, the default position is often to do so,” said Paul Cooper, Dubai-based managing director at Sarasin-Alpen & Partners Ltd., which oversees more than $500 million in the Middle East. “Promotion to the MSCI index would therefore certainly yield additional demand for local equities and given the substantial amount of money benchmarked to the MSCI index the impact would be significant.”

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler in Dubai at cmaedler@bloomberg.net

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