Until late last year, one leading Abu Dhabi-based investment banker liked to open his presentations on the United Arab Emirates (UAE) capital markets by striking a stark note of comparison. He would point out to his stunned audience that the aggregate daily share trading value of the Dubai Financial Market (DFM) was less than the daily turnover of the city’s largest Carrefour supermarket.
Because only 25 companies are listed on the DFM, rising to 35 on the nearby Abu Dhabi Securities Market (ADSM), he would argue that the local bourses are too small and illiquid for institutional investors to trade on them even if they wanted to. Strict limitations on foreign ownership imposed by the listed companies themselves did not help, and as petrodollars gushed into the national economy in search of assets, price/earnings ratios were being pushed up dramatically.
In recent months, local retail investors have been literally scrambling for shares as they seek to cash in on record GDP growth and a bouquet of initial public offerings (IPOs) brought to market in quick succession. Oversubscription records have tumbled on a monthly basis; the $135m May IPO for Aabar Petroleum topped the list when it was oversubscribed 808 times on the back of heavy leveraging. The UAE Central Bank even stepped in to fine four unnamed local banks, which it accused of flagrantly flouting 1:4 leverage limits for IPO lending by up to 10 times.
Although trading values on both the DFM and ADSM have been rising fast, executives at the fledgling Dubai International Financial Exchange (DIFX) are confident that they will be able to pick up where the domestic bourses leave off, and build a stable cross-border stock exchange offering a breadth of products, issuers and intermediaries never seen in the Gulf before.
Ambitious plan
Born of the Dubai International Financial Centre (DIFC), a financial free zone that began issuing licences to global banks and asset managers last September, the DIFX is scheduled for launch late this month. If all goes according to plan, it will make Dubai the new London, New York or Hong Kong of the Middle East, becoming an exchange of globally recognised standards operating in a market that previously sat in a trading void.
His Highness Sheikh Mohammed bin Rashid al Maktoum, crown prince of Dubai and president of the DIFC, said: “Our vision is to complete the global financial system – to fill the gap not covered by the international financial centres of Europe, the Far East and North America.”
In the past two years, an executive team in Dubai has worked to develop an exchange using best practice synthesised from leading exchanges overseas. Chaired by Lynton Jones, former managing director of Nasdaq International, and led by chief executive Steffen Schubert, former CEO of Brussels-based Easdaq and MD of the Bavarian Stock Exchange, the team currently resides in temporary offices near the DIFC but has already begun to move into custom-built premises near the centre’s flagship Gate building.
One key selling point that they have been promoting to international issuers and market makers is the diversity of securities that can be listed, from equities and bonds (both conventional and Islamic) to funds and derivatives. Non-sovereign bond issues are still a rarity in the Gulf region, and derivatives are almost unknown.
A second key selling point is the geographic footprint that the DIFX will have, which stretches beyond oil-rich Arabia into Africa in the south and west, the borders of Europe to the north, and into the Indian sub-continent and Asia to the east. In the short to medium term, the expectation is that issuers will be attracted by the deep pool of liquidity available in the Gulf. But as the market matures, issuers and investors alike will be attracted from further afield by the opportunity to list on globally recognised terms with greater visibility than could be achieved by listing on a smaller domestic bourse. Securities will be denominated in US dollars, and the language of business is English.
Parallel markets
Mr Schubert is confident that the DIFX can operate in tandem with local stock exchanges, even if they are catalysed to update their listing procedures, improve transparency and liberalise foreign ownership rules. “There’s always a grey area where companies decide whether to approach a local or international market, and there are good reasons for both market types to exist in parallel,” he says.
“I don’t think we’ll lose any of our attraction, and not just because we require a 25% minimum float rather than the 55% demanded by some local bourses. Our appeal is the package spanning our regulations, best-of-breed trading platform, clearing and settlement systems, and the fact that we don’t restrict foreign ownership. Brought together, these features are distinct from the services provided by the local exchanges surrounding us.”
In the past three years, the most spectacular benchmark growth on Gulf Cooperation Council (GCC) stock exchanges has been driven by part-privatisation IPOs. Wishing to share state wealth with their citizens, the governments of countries including Qatar, the UAE and Saudi Arabia have offered portions of state-owned companies to their citizens at what analysts read as discounted prices. Once the IPO is complete and the share price begins to rise, investors naturally then see the benefits.
While accepting that the DIFX may not win Gulf IPO listings for political reasons – governments would rather support their home capital market than a foreign one – Mr Schubert nonetheless believes there will be plenty of scope to attract secondary or depositary receipt listings and debt issues that have historically gone to bourses in London or Luxembourg. Their price appreciation may not be as dazzling as that of leading domestic IPOs, but slow and steady growth is preferable to flash-in-the-pan price spikes and speculation anyway.
On the doorstep
Since 9/11, asset managers in the Gulf have been reporting that clients prefer to keep capital close to home if they can find the assets to invest in and the right local service proposition – one of the cornerstones of the DIFC’s sales pitch to incoming financial institutions. The DIFX similarly hopes that Arab corporate issuers and their peers from neighbouring continents will be tempted to bring their business to Dubai if it can provide the right market on their doorstep.
As The Banker went to press, no launch listings had yet been formally announced, but the rumour mill in Dubai had already named a few internationally oriented companies that might be first movers.
Etisalat, the ambitious UAE state telecoms company, is believed to be considering a secondary listing to complement its primary listing on the ADSM. Kuwaiti-owned satellite TV operator Showtime Arabia, UAE jeweller Damas and Beirut-based telco Investcom Holding have also been linked to potential IPOs. As for intermediaries, the DIFX is being coy until names are formally announced, but HSBC has already gone on record to say it wants to become a market maker.
Because it plans to vie with the likes of the London and New York stock exchanges for status, the quality of the regulatory regime by which the DIFX will be governed is seen as crucial to the exchange’s future. Although the DIFX Markets Authority has been designated a self-regulating organisation that is able to monitor trading activity and authorise new listings, the exchange is ultimately answerable to the captive regulator of the parent DIFC. As such, the Dubai Financial Services Authority (DFSA) will be the authority of recourse should any illegal activity be detected, just as it is for banks and asset managers operating in the main centre.
Despite a rocky patch in the summer of 2004 when two high-profile sackings tarnished the DFSA’s image, the authority has since commenced operations and has licensed institutions, including Merrill Lynch, Credit Suisse and Standard Chartered. Last June David Knott, former chairman of the Australian Securities and Investments Commission, joined the DFSA as chief executive. The authority has its own rulebook and laws, supported by a Financial Markets Tribunal (FMT) and a DIFC court operating under English law outside the purview of UAE legislation.
Quiet confidence
While the proof that their efforts were worthwhile will not come until listings begin in earnest, DIFX executives are already quietly confident in the success of their venture. They have even launched a DIFX Academy, designed to provide capital markets training courses to exchange members and investors, in a bid to ensure that anyone who wants to trade knows how to do so. Reputations may not be built overnight, but as Mr Schubert observes, when people operate in “Dubai time”, the expectation is that results are never more than a few months away.
