Even in the business world, life slows right down in the heat of the summer. People don't just walk more slowly. They also start fewer projects, take more holidays and delay decision-making at the office. Coupled with the month of Ramadan, this summer in particular has put business activity on the back burner, behind family life, leisure and contemplation.

So it is no surprise that trading on the UAE's stock markets has slumped in recent weeks. As the summer temperatures have spiralled higher, the volumes have spiralled lower.

This declining trend however is not merely seasonal. It has been going on for two years and reflects some fundamental truths about this country's capital markets, which are more starkly apparent now than ever before.

The figures make depressing reading. The value of equities traded in the UAE in the first six months of this year was 43% down from the same period of 2009 and fully 81% lower than the first half of 2008. This performance is much weaker than that of international stock markets around the world and is causing pain not only for UAE brokers, 12 of whom have filed official requests this year to halt operations. It is also damaging the capital markets fabric of the country.

Low trading volumes make it hard to value shares accurately and can deter companies from going public in an IPO. It is vital for the health of the UAE economy that activity revives, enabling exchanges to perform their function of efficiently channeling investors' money into successful enterprises.

Attracting investors

The depressed volumes partly reflect the global economic crisis, which did not spare the UAE. But as the economic outlook recovers, several steps can be taken to bring former investors back to the stock markets and attract new ones.

Indeed one important measure was put in place last month and is already starting to bear fruit. In a landmark project (which shows that not all business activity ceases in summertime) Nasdaq Dubai and the Dubai Financial Market merged their liquidity pools.

The institutional investors which dominate trading on the former have thus been brought together on one trading platform with the latter's more than 500,000 individual investors. This mixture supports overall liquidity and Nasdaq Dubai's retail trading has already seen a noticeable upswing.

Another important step that would give investors confidence to trade again would be for the UAE to meet the requirements of MSCI for promotion to its Emerging Markets status. MSCI classification is a benchmark for fund managers around the world. Billions of dollars would automatically flow into the UAE if promotion were achieved.

A major reason for the UAE's failure to satisfy MSCI is its restrictions on foreign ownership of shares. Many listed companies allow no foreign investment at all, or impose a stricter limit than the 49 per cent that is in most cases allowed by UAE law.

Opening the door to more foreign investors can seem like a leap of faith. But I believe it would be beneficial as it would attract responsible buy-and-hold investors, lead to more accurate share valuations, and connect the UAE more closely to the global financial system.

Deficiencies

The MSCI has also identified deficiencies of a more technical nature. These include a need to move to a settlement system similar to that used in international markets, called ‘delivery versus payment', and a need to end segregation of trading and custody accounts.

The good news is that the UAE authorities are well aware of the importance of meeting MSCI criteria and are working hard to see how this can be achieved.

An active trading culture would also be supported by the introduction of responsible short selling mechanisms.

These are common on international markets and are critical to liquidity, but do not exist in the UAE except on Nasdaq Dubai. Short-selling allows investors to borrow shares, sell them, and buy shares (of the same company) at a later date which they return to the lender.

Since responsible short-selling allows investors to make money in periods of falling prices, they do not leave the market when it turns down; they simply change their strategy.

In this area too, UAE authorities are assessing how to move forward.

Another key factor is trust in the overall business environment. The global financial crisis eroded this everywhere.

Investors need to believe that public authorities as well as private businesses are effective and competent. In the stock markets, this requires high quality regulation of listed companies, including enforcement. All of us involved in the UAE markets are working to further improve progress on this front.

I am confident that trading activity will bounce back, not just from its summer lull but in a sustained manner that reflects a maturing of the UAE's capital markets.

Next summer should be a busier time for us all.

The columnist is chief executive at Nasdaq Dubai. Views expressed here are his own. You can contact him at singer@nasdaqdubai.com.