How to revive the UAE stock market

The new board of the Emirates Securities and Commodities Authorities, now chaired by Economy Minister Sheikha Lubna, has quite a task ahead to rekindle confidence in the bombed out UAE stock markets.

The first signs are good. The ESCA this week gave Emaar Properties permission to buy back up to 10 per cent of the company's capital. This mechanism was previously used in the early 2000s to boost Emaar's stock and certainly stabilized its price at that time, although it created a stock overhang in the market.

There have also been moves to create greater transparency. The Abu Dhabi Securities Market this week issued a regulation requiring the publication of share trading by the directors and executives of listed companies. This will combat insider trading.

Trading slumps

However, what the UAE stock markets really need is more trading. The volume of shares traded on Sunday 2nd July, for example, was only $80 million, a pitifully low volume for a stock market linked to the second largest economy in the GCC.

For what has happened is that the retail investors who made the Dubai Financial Market the best performing in the world in 2005 have had their confidence shattered; and many have lost their entire wealth due to borrowing for stock market investment, a form of bank lending that is illegal in most advanced countries.

Confidence boosting measures like share buy backs and insider trading rules are unlikely to tempt these guys into the market again, even if they still have some cash available. Instead, a new pool of investors will have to enter the market to get things going.

New investors

There are two possible sources: government agencies, for example the Abu Dhabi Investment Authority, could simply enter the market and buy up shares at depressed prices. Or the ESCA could put pressure on the listed companies to open up their share registers to foreign shareholders.

At present there are still only a handful of companies on the UAE stock markets that allow foreigners to own shares. It would make good sense to change these rules to attract new investors, and besides companies that have no restrictions on share ownership generally trade at higher valuations in any case.

It is not a question of changing the law, for it is perfectly legal for foreigners to own UAE stocks. This merely requires the companies to change their own regulations to permit foreign shareholders.

But the collapse of the UAE stock markets is something that can be sorted out, and this will benefit the whole economy. The promotion of initial public offerings is another area ripe for major reforms, although present market weakness has stopped IPOs for the time being.

Perhaps the union of the Abu Dhabi and Dubai trading floors should also now be considered. A newly unified exchange under a new brand image would pull everything together and put the past into the past.