UAE Stock Market Correction Offers An Opportunity To Reform

Stock market corrections often throw up the best opportunities for reform. In the case of the UAE’s pre-Ramadan correction, the most logical way to revive confidence would be to unite the two stock exchanges of Dubai and Abu Dhabi into a single well regulated and more highly capitalised entity.

If nothing else, reform offers investors some compensation for their recent losses and a chance to share the blame.

No speculator buying into the top of a bull market likes to think that they might be in some way to blame for its collapse. It’s always the forces outside of their control that somehow ruined their luck and not their own blind optimism.

However, the initial response of the Securities and Commodities Authority (SCA) to the market correction has pleased few of the current players. The SCA has lowered the capital requirement for brokers by creating two different levels of firms and has tightened its oversight on lending to clients.

Local brokers saw this as a way for regional and international banks to get around them to execute trades and a reduction in transparency because the new brokerages will be operating outside of SCA jurisdiction. Tightening up on margin lending is surely a case of closing the door after the horse has bolted and helps ensure that market trading activity will take longer to recover.

That is also true for the actions taken to monitor statements by local chief executive officers following the dramatic collapse of Arabtec shares after the resignation of CEO Hasan Ismalik.

The SCA has created a committee that includes the Central Bank, the Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM) to monitor CEO statements for accuracy and truth and to monitor their subsequent impact on stock prices.

Better late than never. But then, in a market correction, nobody can really say anything to appease those who have just lost a lot of money.

The last time the DFM crashed from a similar height was in 2006 and it took six long years for the market to bottom. That was partly down to inaction on the part of the authorities that stood by and did nothing proactive to reform local capital markets.

Maybe it will be different this time. The UAE needs a unified stock market with greater involvement by its huge sovereign wealth funds to give the market stability.

Standards of governance also require far stricter control as the farce over Arabtec has just demonstrated. Nobody really seems to have a clue what happened there and yet this one stock tipped the whole market over the edge.

It should not be like this in the UAE in 2014. Its bourses have just been included in the MSCI Emerging Markets Index.

Yet even that has proven a poisoned chalice with DFM stocks being driven up by speculators to twice the average valuation of this index before the final date of inclusion. The fall was an accident just waiting to happen, Arabtec or not.

Could the UAE’s authorities not have acted sooner to prevent this with restrictions on margin trading to calm things down?

It is always easy to be wise after the event, but the fact is that investors may now face a long wait to get their money back. Let us hope it is not six years this time around.

But there is reason to hope for something better. Earlier this year, the authorities commissioned several banks to work on a merger proposal. It is understood that the high valuation of the DFM, whose shares are publicly quoted unlike the ADX, was a hurdle. That should be less of an issue after the recent correction.

Then there are the usual issues of egos and how to merge at the board level to consider. Emirates Aluminum is a recent example that shows this sort of a deal can be done to mutual satisfaction all around.

The real prize of a successful integrated capital market and a much larger regional trading platform based in the Middle East is there for the taking. It would be a serious benefit to the nation and its development, and not just to local investors now out of the money.