The missing link (page 3 of 3)

The Israeli exchange dwarfs other regional bourses, with about double the market capitalization of the Cairo Stock Exchange, for example. Already, many Israeli hi-tech companies head straight to Wall Street to make their market debuts, seeking more lucrative initial public offering deals than they could obtain through listings on the Tel Aviv exchange.
The situation, however, is much different in the Arab world, where many technology stocks are recently privatized telecom firms. For now, the innovation level of Arab technology firms has not been as fast as in Israel.

"There really aren't that many Arab technology stocks," said Steven Bregman, the manager of the Middle East Growth Fund, a US mutual fund launched in March by specialty fund firm Kinetics Asset Management. "There's maybe one company in each of these countries that could qualify."

While Israel would be a natural for a cross-listing arrangement with the Nasdaq market, any Nasdaq cooperative agreement that tries to span the entire Middle East with Israel as a central player could run into big political problems - especially in light of recent turmoil between Israel and the Palestinians. Already, there is next to no cross-trading between Israel and its Palestinian neighbors. Nor are there significant cross-listing arrangements with peace partners Egypt and Jordan. Now, especially, there would likely be some major political obstacles to getting Arab countries' shares "co-mingled" with Israeli stocks, notes Bregman.

In addition, there are also issues of how transparent the region's markets really are. Experts say problems such as insider trading on some of the region's exchanges will have to be better controlled if local markets want to attract foreign investors who have confidence in stepping into local market activity. Financial disclosure also will need to be improved.
There are technological hurdles, too, that would have to be overcome for Middle Eastern bourses to link up with a big global market. Do Arab bourses have the software and clearing systems to be able to process trades quickly enough? Analysts say that the exchanges have rapidly improved their technology, but more capital investment would certainly be required.

Bregman and other experts say that what they see as much more likely, at least in the short term, is some sort of pan-Arab exchange that would cross-list shares - meaning shares are available for purchase in more than one regional market - facilitating trading throughout the Middle East and increasing liquidity of many different types of stocks. All the markets in the region have been improving their technology, going more electronic with all kinds of market data available on the Internet, making the logistics of a cross-border arrangement all the more possible, he said.

Such a system could link the region's bigger financial markets, including Egypt and Turkey, with a major financial center such as Lebanon, as well as smaller bourses such as those in Jordan, Oman and Dubai, he said. Already, there are a number of regional investment partnerships, with expatriate capital being channeled into Lebanon and other local markets. From there, "it many not be such a stretch to cross-listing," Bregman notes. "I think this should be a goal. It should be a long-term target for the region."