It has been two years since the UAE and Qatar submitted their bids to Morgan Stanley Capital International (MSCI) for promoting their stock markets from frontier to an emerging market status. The delay in MSCI’s decision on the upgrade of UAE and Qatar stock markets is attributed to many reasons. Saudi Arabia is also seeking to have its stock market upgraded too.
MSCI decision will have significant implications and give a strong boost to GCC stock markets, especially with regard to attracting foreign investors to these bourses.
In fact, there is a complete separation between the performance of GCC economies and that of their bourses –in a very rare phenomenon in financial markets, since the stock market is a mirror of economy. But, the situation in the GCC countries is quite different as the performance of stock market is unrelated to the good performance of economy, which is supported by high oil prices.
Among reasons behind this phenomenon is cash scarcity in GCC bourses, despite cash surplus in local markets that are looking for investment channels.
However, these stock markets have lost investor confidence for many reasons, notably lack of transparency and governance.
Therefore, efforts by GCC countries to have their frontier markets promoted to emerging markets represent a real chance to overcome confidence crisis between investors and GCC stock markets. MSCI upgrade may allow these markets to get out of the bottleneck they have been experiencing for many years.
As MSCI is considered the largest global provider of instruments that support investment decisions in global markets, MSCI will contribute through its periodic reports on Gulf markets to enhancing transparency of these markets, thus helping them regain the confidence of local and foreign investors. This happens only if UAE and Qatar stock markets, or any other GCC markets, are upgraded to emerging market status after meeting MSCI’s ‘emerging’ market criteria.
The periodic reports will include analyses of indicators and potential risks, as well as the performance of investment portfolios in GCC stock markets, apart from reports on corporate governance, which is weak in GCC markets at the present time.
These reports will definitely be followed up by investment funds, which are looking for investment opportunities, particularly in emerging markets, like GCC ones.
The MSCI bourse upgrade bid coincides with the approaches of GCC financial markets to provide more facilities to foreign investors and allow them to invest directly in financial markets, which is a step forward. This step has advantages and disadvantages that can be avoided by taking measures aimed at developing the instruments of these markets and completing their components.
Apart from MSCI requirements of transparency and governance that will be of great benefit to the GCC markets, and boost investor confidence, there are other requirements by stock markets themselves.
The GCC stock markets can avoid some risks. For example, the potential effects of foreign investment flows into the Gulf markets are not all positive. This is because at a time when foreign investment flows contribute to solving the problem of confidence and liquidity, they may contribute to escalating and fueling speculations.
And there is no easier than GCC bourses to be used in speculations because of the easy entry and exit of hot money and the absence of market maker companies which can help reduce speculations through their financial capabilities and expertise in capital markets.
Therefore, the upgrading of Gulf markets to MSCI’s emerging market index is a very important issue, and once UAE, Qatar and Saudi stock markets are reclassified as emerging markets, they will recover soon after the decision is taken by MSCI. However, these markets need to be well prepared for the upgrade, otherwise the results may come as not expected.
As part of their preparation, the first thing these stock markets need to do is the completion of their legislative and legal structure. The Gulf stock markets need to issue new legislation and rules that give administrations of stock markets more organisational and administrative powers away from the interactions and conflicts of interest.
Secondly, the markets also need to enhance transparency and governance on the backdrop of leaked reports on the financial positions, performance and profits of companies listed on stock markets. This is because the leaked reports significantly affect investor confidence, and even contribute to the shaking this confidence continuously.
Thirdly, they need to speed up the establishment of market maker companies, which are expected to play a major role in promoting confidence in stock markets, supporting their stability and curbing speculations, which have become a hallmark of GCC stock markets in recent years
Hence, there are mutual procedures between GCC stock markets and MSCI, which must be synchronized to achieve the desired purposes from MSCI index reclassification as emerging markets, a move that is expected to receive a positive response once the upgrade decision is given on the pretext of joint efforts by both the global index provider and administrations of GCC stock markets.
