The UAE's financial markets were established relatively late in comparison to other GCC bourses. It started operations in the late 1990s while the one in Kuwait was established around 50 years ago.
But despite the late start, the UAE's financial markets have attained a leading position not just in the region, but on the international stage.
The UAE and Qatar stock markets are currently under review, being considered to be upgraded to emerging markets by Morgan Stanley Capital International (MSCI) — a move that would give the two Gulf bourses a huge boost.
As they are relatively young markets, the Dubai and Abu Dhabi bourses have witnessed sharp fluctuations, especially over the last five years.
As a result of this volatility, the general indicators of UAE markets have increased and declined dramatically, a fact that can be attributed to lack of investment awareness and a preference for speculation over viable and long-term investments.
In many cases, the UAE's stock markets have not objectively reflected the performance of the local economy, unlike international markets where exchanges often rise and fall on the strength or weakness of the global economy. It seems that in the UAE, despite the fact that economic conditions are strong and supported by high oil prices, market confidence is low.
The global financial crisis has only served to magnify this as the economic woes in the US and the Eurozone were felt in the local markets with indices collapsing and trading rates falling to unprecedented levels.
Meanwhile, the share prices of many listed firms plunged to 20 per cent of the initial public offering (IPO) price, a unique phenomenon that usually occurs in markets during times of recessions and economic crises.
As a result, the local bourse bled, which has negatively affected its general performance and its capability to attract more foreign capital.
According to figures, the Abu Dhabi Securities Exchange (ADX) saw a decline of 0.1 per cent in 2010, and the Dubai Financial Market (DFM) fell 9.7 per cent. In 2011, the ADX reported a fall of 11.7 per cent, while DFM saw a 17 per cent drop.
These figures show that the decline in local stock markets has surpassed those in some countries that are facing massive financial crises, such as those in Europe where the main stock indices, along with their counterparts in America, have fallen. Asian stock markets, on the other hand, saw relatively large increases thanks to the good performance of Asian economies.
At the outset of 2012, UAE stock prices continued to decline before they regained and compensated for these declines at the end of January and early February.
Lack of studies
There is a dire need to study the reasons for this phenomenon on UAE stock markets, especially given that many individuals and corporations have suffered huge losses and lost large portions of their savings. Such losses are still ongoing, confirming that there is a lack of studies and scientific justifications, specifically those released by the Emirates Securities and Commodities Authority, which has caused confusion among investors.
There are many solutions to the problems that GCC financial markets face in 2012, including developing the role of the GCC financial market administrations, commissioning studies and research that clarify the strength of regional economies and make clear performance of joint-stock companies listed on the stock markets. This good performance can be measured by profit ratios in 2011, based on which, many companies decided to distribute cash dividends to their stakeholders.
It is also imperative for competent bodies to address the reluctance of institutional investors to come into the markets of the GCC despite the massive financial capabilities of these markets. Qatar's exchange, for example, has remained resilient due to the presence of institutional investments, which have made most of the decline in share prices, particularly bank stocks, to achieve significant gains. This, in addition, to the state's intervention in buying stakes in Qatar banks also has helped the bourse to stay consistent.
Another solution is creating new incentives to stimulate GCC stock markets, revising ownership rates and increasing the contribution of state-owned funds. The return on GCC banks' profits makes an average of nearly three times return on deposit, thus favouring investment in local financial markets.
We also need to work to regain trust in GCC bourses by raising investment awareness and curbing harmful speculation, especially after some markets opened new horizons for speculators by allowing trading in small fractions (fractions of one fils) which raised the intensity of speculation by small traders.
Despite unstable political and security developments in the region, Qatar's exchange was the best performing stock market in the Arab region in 2011, even if its rise sounds modest. This shows the potential to tackle the financial and technical problems facing other GCC stock markets and improve their performance in 2012.
Dr Mohammad Al Asoomi is a UAE economy expert and specialist in economic and social development in the UAE and GCC countries.
