Bloomberg News

U.A.E. May Win Upgrade at MSCI Amid Caps, Templeton Says

June 21, 2011

(Updates with closing prices from fourth paragraph.)

June 21 (Bloomberg) -- The United Arab Emirates’ improved securities settlement system may help MSCI Inc. overlook foreign-ownership limits and boost the nation to emerging-market status, Franklin Templeton Investment Management Ltd. said.

Introduction of the so-called delivery-versus-payment, a program for completing stock transactions, may spur MSCI to lift the U.A.E. from its frontier market ranking, said Joe Kawkabani, Franklin Templeton Investments (ME) Ltd.’s chief investment officer of equities in Dubai. Three other countries eligible for upgrades -- Qatar, South Korea and Taiwan -- probably will stay in their respective categories, analysts and investors said. MSCI is due to announce the decisions at 10 p.m. London time.

The U.A.E. has “solved most of the issues mentioned by MSCI,” Kawkabani of Templeton said in a June 19 phone interview. “If the U.A.E. becomes part of the MSCI emerging- markets index, it would have a very small weighting because of the foreign ownership limits. It’s still a big positive as it puts the U.A.E. on additional radar screens for investors.”

An upgrade of the U.A.E.’s $110.3 billion stock markets is likely to draw more investors as fund managers buy their shares to mirror MSCI’s indexes. About $3 trillion of funds are benchmarked against the index compiler’s gauges. Israel’s benchmark TA-25 Index has surged more than 60 percent in dollar terms since MSCI announced the country’s promotion to developed market status on June 16, 2009. The advance compares with a 45 percent gain in the MSCI Emerging Markets Index and the MSCI World Index’s 34 percent climb.

Popular Uprisings

MSCI’s emerging-market gauge climbed 1.1 percent at 2:50 p.m. in Dubai, halting a four-day slump. The gauge of developed- nation equities rose 0.5 percent.

The BGCC200 Index of Persian Gulf stocks has fallen 4.9 percent this year amid popular uprisings in the Middle East and North Africa. Dubai’s measure dropped 3.2 percent and Abu Dhabi’s gained 0.4 percent. Both emirates are part of the U.A.E., which has so far avoided the unrest that toppled leaders in Egypt and Tunisia, sparked an armed conflict in Libya and reached Bahrain and Saudi Arabia.

The U.A.E. and Qatar haven’t faced uprisings, strengthening the notion of “the U.A.E. and Dubai in particular being the natural hub for businesses working across the Middle East,” Simon Williams, a Dubai-based economist at HSBC Holdings Plc, said June 20.

Dubai’s DFM General Index has climbed 2.9 percent and Abu Dhabi’s ADX General Index advanced 5.1 percent after the U.A.E. bourses started the DVP system on May 29.

‘Positive’ Pace

DVP is a securities industry procedure in which payment for a security must be made when the security is delivered. Under the previous dual-account system, the payment is made to a bank first, which then pays for the security. MSCI cited the old system as a reason for keeping the U.A.E. and Qatar as frontier markets a year ago.

While the process of upgrading the U.A.E. is moving at a “positive” pace, hurdles such as foreign ownership limits remain, Manuel Rensink, MSCI’s head of Middle East and North Africa, told a conference in Abu Dhabi on May 3.

Under existing U.A.E. law, foreign companies must have U.A.E. nationals as their sponsors and are limited to a maximum 49 percent ownership of businesses, except in free zones. Economy Minister Sultan al-Mansouri said June 16 the caps wouldn’t change for now.

“The fact that the U.A.E. wants to keep foreign ownership limits as they are, isn’t a barrier for the markets to be promoted,” said Mohammed Ali Yasin, the chief investment officer at Abu Dhabi-based financial services company CAPM Investments. “There are countries that have foreign ownership limits that are already in” the emerging-markets index, he said.

Ownership Restrictions

Countries designated as emerging markets by MSCI must have “significant” openness to foreign ownership, the index provider’s website said. Taiwan, which is already an emerging market, limits overseas holdings of companies in key industries in varying degrees. Foreign ownership of China Airlines Ltd. is limited to 49.99 percent and Chunghwa Telecom Co. to 49 percent, according to a company list on the Taiwanese exchange’s website.

Qatar, also a frontier market, caps overseas ownership at 25 percent and started the DVP system on April 11. The QE Index has fallen 1.9 percent since the nation’s stock exchange said May 31 that the ownership limits wouldn’t change in the near future.

“Until recently investors had hoped Qatar would raise their limits but such hopes were quashed,” said Paul Cooper, Dubai-based managing director at Sarasin-Alpen & Partners Ltd., which oversees more than $500 million in the Middle East.

South Korea, Taiwan

Companies in Dubai’s DFM gauge are valued at an average 0.7 times net assets, or book value, compared with 1.8 times for Qatar’s QE Index and the MSCI Emerging Markets Index.

South Korea and Taiwan, Asia’s biggest emerging markets after China and India, will retain their MSCI classifications as emerging markets because the index compiler’s requirements for upgrades haven’t been met, according to Bank of America Corp.’s Merrill Lynch.

MSCI skipped South Korea for an upgrade for a second year in 2010, citing the “rigidity” of the country’s investor identification system and the lack of an active offshore currency market as well as anti-competitive practices relating to stock market data. MSCI cited concerns such as lack of full currency convertibility for not upgrading Taiwan last year.

No Change

“We do not forecast a change to Korea’s market status within the MSCI as the issues previously highlighted by MSCI have largely not been addressed,” Arik Reiss, the head of Asia equity derivatives research at Merrill Lynch, wrote in an e- mailed response to questions. If the markets aren’t reclassified there will be "little or no impact except for a small dent to sentiment."

Stocks from the two Asian nations are already included in the $7.79 trillion MSCI Emerging Market Index, which is down 3.6 percent this year. South Korea’s benchmark Kospi Index is little changed, while Taiwan’s Taiex Index has retreated 4.2 percent.

Dubai’s DFM General Index advanced 0.4 percent today, the most since June 15, while Abu Dhabi’s ADX General Index slipped 0.9 percent. Qatar’s QE Index was little changed.

An upgrade for the markets to emerging-market status may draw as much as $5 billion in new money “as a best case scenario of an overweight bias,” according to Walid Shihabi, chief executive officer at Shuaa Securities LLC, a Dubai-based brokerage.

“The MSCI Emerging Market Index is the most commonly followed index for investors in the emerging world,” said Cooper of Sarasin-Alpen. “Entry into it will provide a higher profile and almost certainly yield a significant increase in demand for local shares.”

--With assistance from Saeromi Shin in Seoul and Weiyi Lim in Singapore. Editors: Darren Boey, Laura Zelenko

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 at cmaedler@bloomberg.net


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