- A defining period for UAE capital markets
The UAE economy is set to grow with significant pace in 2014 due to an overall positive outlook for sustainable growth, and with investors’ confidence building momentum. The UAE is particularly noted for having the dynamism of the west whilst maintaining the culture of the east.
The IMF has predicted a 2014 GDP growth rate of 4.5% which is supported by Abu Dhabi’s buoyant oil and gas industry and its significant infrastructure and industrial investment, spurred on by a rebounding Dubai economy, further enhanced by the recent Expo 2020 win.
Equity Capital Markets
In June 2013, the UAE’s classification was upgraded from a frontier market to an emerging market, as a result, in May 2014, the three UAE indices, namely, the Abu Dhabi Securities Exchange (ADX), the Dubai Financial Market (DFM) and Nasdaq Dubai, are expected to be incorporated into the MSCI’s emerging markets index. Commentators have opined that this will attract over USD 270 million into the stock exchanges.
The UAE stock exchange performance in the past year is notable, with the ADX ending 2013 with a total of almost USD 23 billion in share exchange value, posting a significant volume growth of 282% compared with 2012. Socio-political turmoil in the wider region is driving trading volumes with investors seeking a safe haven. This is positively affecting real estate and stock values in the UAE. Moreover, the index opened at 2,631 in 2013, and closed 63% higher at 4,290.
In 2013, the DFM was the second best performing exchange globally and in January 2014 it achieved a new five-year high to 3,819 points recovering back to the January 2008 peak.
Initial Public Offerings (IPOs)
A strong pipeline of issuers looking to launch IPOs regionally is expected in the next 18 months; Grant Thornton (GT) provides IPO readiness assessments and acts as a sponsor to companies seeking to list, and GT expects to see several UAE local family groups evaluating listing opportunities in the effort to seek capital injections and to raise their profile regionally. A well-known Abu Dhabi bank expects six companies to go public in 2014 which is estimated to raise USD 2 billion. In 2013, the only sizable local IPO was Damac Properties, however it’s Management opted to list on the London Stock Exchange being valued at USD 2.65 billion post offering.
The last significant IPO which was valued over USD 1 billion, which was 15 times oversubscribed, was the port operator DP World Ltd, raising USD 4.96 billion in November 2007. After a 7 year retreat, it is widely anticipated that there will be a return to this kind of IPO activity.
Bourse Consolidation and Regulation
The UAE's stock market regulator, the Securities and Commodities Authority continues to improve and implement higher standards of regulation since its inception in 2002, whilst ensuring investor confidence but also acting not to hinder capital market activity locally.
According to Bloomberg, Abu Dhabi and Dubai have completed due diligence on a potential merger of the ADX and DFM, which will ensure a more efficient and national approach to the global investor community.
Also, there is motivation from UAE listed companies to lift foreign ownership limits on their shares. Under UAE rules, investors from outside the UAE or GCC are permitted to buy up to 49% of their shares. In order to attract further equity from the international investment community including large financial institutions, therefore there is a calling to lift the limit of foreign ownership on UAE shares. The trend to increase limits is noticeable, for example, in Q4 2013, were two major UAE listed banks and a listed real estate developer who have approved increased foreign ownership limits from lower levels to 20-25% of their share capital.
Debt Capital Markets
New bond rules are expected to give further stimulus to UAE debt securities in 2014. According to IFR, a Thomson Reuters unit, bond issuance from the region is expected to flourish due to significant infrastructure investment and refinancing.
The UAE, which has the largest portfolio of outstanding debt securities in the GCC, has issued new rules for the issuance and trading of covered bonds (bonds which have a preferential claim on the assets in the event of a default). This is a welcomed initiative for the development of the UAE’s debt market, and will allow for a new source of funding for commercial banks.
Islamic Financial Markets (Sukuks)
In line with the initiative of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Dubai is leading the way to become a global hub for Islamic finance with the aim to drive Islamic banking and Islamic capital market activity in the UAE and wider region.
So far in 2014, Emaar Properties has dual listed a USD 500 million sukuk, issued in 2011 on Nasdaq Dubai, providing further momentum to the Dubai’s resolve to become a global sukuk centre. Furthermore, UAE based GEMS Education celebrated the listing of a USD 200 million sukuk on Nasdaq Dubai.
Defining Period for UAE Capital Markets
The next two years are set to be a defining period for UAE capital markets, with expectations of increased regional and international investment into the UAE; growth in both debt and equity security valuations; increased trading volumes and a return to a more frequent and successful IPO listings period. Undoubtedly investors are now more confident to deploy cash on the side lines into the UAE markets with expectations of robust medium and long term returns.