Qatar decided this year to calculate foreign ownership limits as proportions of total shares outstanding, not as proportions of freely floating shares. The move has effectively doubled the room for foreign investment in companies such as QNB and Industries Qatar. PICTURE: Nasar TK

0.5 adjustment factor removed for most stocks in index; passive flows into UAE, Qatar may total $1bn; change to Qatar foreign ceiling calculation was key; huge jump in turnover eases MSCI concern about liquidity; foreigners still not close to hitting ceilings

Reuters

Dubai

A decision by equity index compiler MSCI to raise the weightings of key stocks in the UAE and Qatar reflects growing liquidity in those markets and sets the seal on their emergence as mainstream investment destinations.

In May this year, MSCI upgraded the UAE and Qatar to emerging market from frontier market status. But it also diluted the impact of the upgrade by applying an “adjustment factor” of 0.5 to eight stocks there, citing “accessibility issues to international institutional investors”.

In a semi-annual review published at the end of last week, MSCI removed the adjustment factor for most, though not all, of the eight stocks - indicating that it believes obstacles to foreign investment in the markets are diminishing.

The adjustment factor was abolished, with effect at the end of this month, for Emaar Properties, Dubai Islamic Bank, QNB, Industries Qatar, Doha Bank and Commercial Bank of Qatar. MSCI also raised the index weighting of First Gulf Bank through other means.

The 0.5 adjustment factor remains in place for Arabtec Holding and Dana Gas.

According to brokerage EFG Hermes, the weighting increase will result in combined net inflows of “passive” funds - those which base their investment decisions entirely on the make-up of equity indexes - of $1bn into the two countries.

That is not much compared to their national market capitalisations of around $200bn, but it is enough to stimulate trade in the short term.

“We estimate that the changes highlighted above will increase Qatar’s weight in the MSCI EM index from 0.63% to 0.92%, and UAE’s weight from 0.54% to 0.72%,” EFG said in a research note.

The adjustment factor was originally imposed because of issues such as companies’ ceilings on total foreign investment in their shares, small free floats of tradable shares, and low liquidity in stocks, which makes it difficult for investors to get into and out of equities.

These problems have not disappeared, but both countries are moving to resolve them. One major step in that direction was Qatar’s decision this year to calculate foreign ownership limits as proportions of total shares outstanding, not as proportions of freely floating shares.

That move effectively doubled the room for foreign investment in names such as QNB and Industries Qatar.

Major UAE companies had mostly decided to increase their foreign ownership limits even before the upgrade in May.

Despite this, concern about liquidity and the possibility that foreign investors would bump up against limited free floats prompted MSCI to apply its 0.5 adjustment factor.

“They did it because they were not sure there was enough headroom for foreign investors,” said Akber Khan, director of asset management at Al Rayan Investment in Doha.

A jump in trading volumes on both countries’ markets this year appears to have eased MSCI’s concerns.

Dubai Financial Market, the emirate’s bourse operator, said last month that the value of stocks traded in the first nine months of this year nearly tripled from a year ago to 315.5bn dirhams ($85.9bn).

According to data from Qatar’s bourse, traded value there also nearly tripled in the same period to 153.2bn riyals ($42.1bn). Abu Dhabi’s nine-month traded value more than doubled to 124.3bn dirhams.

The markets are considering steps to increase turnover further; for example, Qatar may slash the par value of its shares by a factor of 10 to 1 riyal in order to make them easier to trade.

Also, the markets’ experience since May suggests inflows of foreign money - Dubai’s bourse has reported net inflows of 4bn dirhams this year - have been broadly distributed enough to avoid pushing foreign holdings up to ownership ceilings.

Foreign investors from outside the Gulf Co-operation Council still hold only 23.6% of Emaar, for instance, less than half of the 49% quota. In QNB, foreigners hold just over a quarter of the allowed 25% quota.