Owing to the ongoing geo-political tensions, surging inflation, rising interest rates and global economic slowdown, investors have mostly been downbeat about Emerging Markets’ prospects. Despite this bearishness on Emerging Markets, the Gulf Co-operation Council (GCC) region is doing well - largely because it has been insulated from the wider volatility by soaring oil & gas prices and healthy foreign investor inflows. Within the GCC itself, investors are incredibly excited about some of the opportunities available in the UAE and Qatar. So what is driving this interest?
Healthy economies prevail in the GCC region
Growth indicators for Qatar and the UAE are broadly positive. In the case of Qatar, Standard Chartered is projecting GDP growth of 4.7 per cent in 2022, as more energy consumers diversify away from Russian gas, while the country is also expected to reap the rewards of hosting the FIFA World Cup. In the UAE, Standard Chartered is forecasting GDP growth of 6.9 per cent in 2022 as structural reforms – including the planned corporate income tax and liberalisation of residency rules – put the country on a stable macro and fiscal footing.
Initial public offering (IPO) activity in the Middle East has also been robust in 2022, with Bloomberg data indicating listings in the region raised $11.4 billion in the first half of the year.1 In the 12 months leading up to June 2022, IPOs in Dubai and Abu Dhabi totalled $11.9 billion.2 Notable IPOs in the UAE included the $2 billion listing of Borouge, a petrochemical company, which listed on Abu Dhabi Exchange (ADX) in an offering that was x42 oversubscribed,3 together with Dubai Electricity and Water Authority (DEWA), which made its $6.1 billion stock market debut on Dubai Financial Market (DFM).
Although its main market is smaller than that of the UAE, there are 47 companies presently listed on the Qatar Stock Exchange (QSE), two of which went public this year.
Broadening investment horizons
A number of measures are being adopted to stimulate inward investor flows into the UAE and Qatar, including the introduction of new investment products. For example, Dubai is rapidly becoming one of the biggest listing destinations in the world for Sukuks – a rapidly growing asset class - with $80.9 billion of Sukuks currently listed in the market.4 Qatar is steadily pushing its liberalisation agenda, having abolished all limits on foreign ownership of companies in 2021, the market has since launched QE Venture Market (QEVM) providing a listing and trading venue for SMEs. Qatar’s recently launched MSCI QSE 20 ESG Index aims to meet the growing demand responsible portfolio investment opportunities.
Inroads are also being made in both markets around derivatives, in what will help support diversification and provide investors with proper hedging facilities. Last year, ADX launched a derivatives market enabling investors to trade single equity futures and single index futures, while Qatar is expected to unveil its own derivatives market in 2024.
Looking ahead, Dubai is already trying to position itself as a regional hub for digital asset trading, having introduced the Regulation of Virtual Assets (DVAL), an ambitious piece of legislation establishing Dubai Virtual Assets Regulatory Authority (VARA), a body entrusted with overseeing digital assets - together with a framework governing digital asset activities.
Recalibrating post-trade in the region
With all eyes currently fixated on Saudi Arabia’s liberalisation programme, it is easy to forget that both the UAE and Qatar have made enormous progress too by enhancing their respective post-trade processes.
Coinciding with the launch of its derivatives markets, the UAE has said it will create domestic central counterparty clearing houses (CCPs). CCPs are a mechanism for improving market stability and efficiency. In fact, some institutional investors argue CCPs are essential if countries are to successfully demonstrate that they are adhering to industry best practices.
Elsewhere, Qatar has made a number of other substantive changes to its post-trade regime. Most significantly, Qatar is in the process of reducing its trade settlement cycle for securities from T+3 to T+2, bringing it into line with Europe and the US. Although the US, Canada and India are now in the process of compressing their settlement cycles even further to T+1, there is no indication this will be happening in Qatar - or the UAE - just yet.
Other major post-trade ambitions in Qatar have included its planned adoption of a single account settlement model; the introduction of positive affirmations and the establishment of new trade fail management procedures.
Navigating barriers in the region
Although the UAE and Qatar have made notable improvements to their capital markets, the GCC region – more generally - still has a lot of work to do.
While omnibus account structures are now more prevalent, opening up accounts in different GCC markets can be challenging for foreign investors owing to the laborious documentation requirements it entails. The lack of harmonisation of depository account opening requirements within the GCC is problematic, and harmful to cross-border investment. This is typified by the absence of transferable national investor numbers (NINs) in the GCC, which makes it difficult for allocators to build up positions across multiple markets.
There is also growing trepidation that certain GCC economies are rolling back on some of the progress they made around digitalisation during COVID. Just as countless markets digitalised their account opening processes at the start of the pandemic, the GCC was no different, and the efficiency benefits were immediately realised by investors. With the pandemic now running its course, concerns are mounting that some GCC markets are once again reverting to manual processing, much to the frustration of investors.
Moving in the right direction
Amid the wider sell-off underway in emerging markets, GCC economies such as Qatar and the UAE offer some glimmers of hope. Strong macro fundamentals and a willingness to implement far-reaching reforms – including the establishment of new investment products and post-trade infrastructure - have put both markets in an excellent position to attract institutional investment moving forward.
This article is based on themes discussed during the Standard Chartered Frontier Day conference.
1 Bloomberg – June 1, 2022 – Middle East IPOs on track for best ever first half as oil surges
2 Bloomberg – June 9, 2022 - $12 billion UAE IPO rush
3 The National – May 31, 2022 – Borouge’s $2bn Abu Dhabi IPO oversubscribed 42 times
4 Nasdaq Dubai – June 8, 2022- Nasdaq Dubai welcomes listing of two Sukuk issuances by the Government of Indonesia with a total value of $3.25 billion
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