Dubai: The first quarter of 2014 witnessed improved liquidity and turnover on the UAE markets as more companies revised their foreign ownership limits.

During the last few months a number of UAE listed companies such as Dubai Islamic Bank, Deyaar, Mashreq Bank, Union Properties and Al Khaliji Bank announced their decision to increase their respective foreign ownership limits.

Last week Qatar decided to raise foreign ownership in Qatari stocks by investors outside the GCC nations to 49 per cent from the current 25 per cent. The move is widely seen to boost foreign institutional fund flows into the market.

“Under the new directive, the proportion of non-Qatari ownership would be computed based on each company’s total capital and not on its tradable shares. The news should not have an immediate impact on Qatar’s weight in the EM index, but the representation of Qatar could improve post the next Semi-Annual Review on 6 November”, said Aleksandar Stojanowski, Research Analyst at Deutsche Bank.

The incremental fund inflows from both active and passive emerging market funds could improve as the weight of Qatari stocks increases in the EM index. The inflows can be spread out in time and depends on when the individual companies raise their ownership limits and subsequently MSCI increases the respective adjustment factor. In aggregate, between active and passive funds Deutsche Bank research estimate an additional $440 million (Dh1.6 billion) could come into the Qatar equity market.

Upside potential

Analysts said strong first quarter corporate earnings in Qatar and the UAE support the current valuations with upside potential. In the first quarter of this year the UAE companies reported a median growth of 24 per cent, while in the case of Qatar it was 10 per cent.

“A sustainable [corporate] earnings growth of over 10 per cent will help valuations stay reasonable in the regional markets. While MSCI inclusion is very positive for both UAE and Qatar the recent increase in foreign ownership limits are going to improve volumes and liquidity,” said Anita Gupta, Equity Strategist at Emirate NBD Wealth Management.

Qatar has displayed resilient earnings momentum, even in the face of the global financial crisis, as high levels of government expenditure have kept growth in non-oil GDP at robust levels. The UAE remains at a very early stage of its recovery cycle, with earnings forecasts only having reached mid–2010 levels.

“Equity markets in the UAE are undergoing a strong recovery supported by strong macro economic environment. The MSCI upgrade is certainly going to positively influence the stock valuations and turnover over a period of time, although an immediate impact on the stocks included in the index could be limited,” said Garbis Iradian, Deputy Director of Institute of International Finance (IIF) for Middle East and Africa.