Is "Staying Out of The Markets" Really an Option?

17 Aug, 2002

'If you cannot take the heat, stay out of the kitchen', used to be an admonition, given regularly to those who wish to have the cake and eat it too i.e. ones that want the advantages and the benefits of the upside, without any of the downsides. As most economic / financial activities tend to be a mixed bag, one needs to learn to take the rough and the tumble with the smooth and the successful i.e. be prepared for the worst, while hoping and trying to achieve the best. This is what separates the men from the boys.

It is in this context that we should examine whether the Dubai Financial Market (DFM) and the Abu Dhabi Securities Markets (ADSM), that are now a few years old, have come of age. It is true that the trading volumes have picked up this year, thanks to a growing recognition, among local investors, of the attractive dividend yields and the price earnings (P/E) ratios that obtain in the domestic stock markets.

Equally a fear of the unknown lurking shadows or innuendoes / elements (such as sequestration of Arab assets by the U.S. authorities in the event of a conflict or a continuing sharp drop in the Western stock markets etc.) propel many to opt for the local stock and property markets; that have literally become safe havens. Besides risk aversion among investors is building up in an unprecedented manner and has hastened the reverse money flow into the region. Therefore, more by default than by design, the local financial markets have become the beneficiaries of this liquidity surge leading to higher volume, trades, activities and exposure in the 'exchanges'. This is not to deny the excellent work done by the authorities that preside over these two markets. Quietly and efficiently, they have built up credible settlement systems with dematerialization ('demat') processes that allow for seemingly 'seamless trading' on the floor(s).

Yet, there are a few shortfalls and residual issues that require to be dealt with. For instance, the link-up between the DFM and the ADSM, remains, as yet, tenuous. They have ended up as two distinct exchanges as opposed to operating as adjuncts of the same (and one "national bourse"). Another major need is for them to pursue the public companies relentlessly to come on board in full measure. Some of these public joint stock companies (PJSCs) are still fighting shy of listing in the official exchanges and their shares continue to trade in the informal OTC markets. In this context, it was a huge plus for ADSM that Etisalat chose to list its shares on it. This scrip accounts for over a third of the local market capitalisation. Attracting Etisalat to its floor, to the discipline of the bourse and which move was marked with a share split, have indeed given a boost to liquidity and accessibility in the local market.

Clearly the two exchanges (with electronic trading, settlement and depositories) do offer immense advantages to investors. But the corporate sector needs to play its rightful part. It should not be entirely upto a company to deny the above 'exchange' facilities to its shareholders. Instead these companies need to be educated and encouraged to list and dematerialise their shares. While DFM and ADSM have done good work in holding seminars for spreading the 'good word' far and wide, they still need to reach out through the media and woo a wider audience, comprising key decision-makers in insurance companies, banks or other corporations that are outside its ambit, to take their rightful place in the new market system. Eventually, some form of official pressure may have to come from the Ministry of Economy and Commerce and / or the Emirates Securities and Commodities Authorities to compel those staying out to embrace the automated official bourses. Public companies that wish to opt out (or 'cop out', as the case may be) because of perceived pressures, need to be nudged gently, failing which, penalised or differentiated for holding out.

It is not in the interests of the shareholders that their shares in a company should remain in paper form and traded in the OTC market, sometimes in an unprofessional and inconvenient manner. Ultimately these are like traffic rules, if a new highway is built. They may have to be enforced for the common good. One suggestion would be to require these companies to table this (listing and 'demat') issue as a resolution at their annual shareholders' meetings (AGMs).

If a majority of the shareholders choose to authorise listing, then that decision needs to be respected. Of course, those voting against or for a resolution can always vote with their feet i.e. sell the shares if they find it inconvenient to hold and trade, compared to others available in that market segment.

The corporate fear of the markets stems from some sharp practices of the past and the worry that the market prices do not often reflect their inherent fundamental values. This is a perennial problem in most emerging markets; wherein the so-called 'price discovery' does not take place effectively. The trading community is composed of relatively small pools of investors and especially so during a downturn in the economy. In some instances, the scrips trade at 'depressed' levels and even the book value is not reflected in the prices. Similarly, the small number of traders in a stock market end up, reflecting their personal preferences or positions. If they are long in a particular scrip and want to dump it, their covert and even overt actions, exaggerate price movements. This can be off-putting to the companies that may otherwise be doing well in financial terms.

This is 'the heat in the kitchen' that the companies would have to get used to in a markets-based economy increasingly in this globalised era. Equally, it is for the 'chefs' (the exchange chiefs) to ensure that the kitchen does not get overheated! That would be uncomfortable, not just for the staff, but could result in (un-edifying food) an adverse impact on what is being served out of the kitchen. It is simple to say 'stay out of the kitchen' but exchanges are like community kitchens. Once you are in it, it is difficult to escape. Dropping this culinary analogy further; it is suffice to say that there is a critical collective responsibility on the part of each participant, to work towards smooth and successful market services for their stakeholders; be it by way of trading, brokerage or market floor activities.

Similarly, the ownership rules contained in the articles of association of companies, need to be harmonised. Here again, what is needed is a forum for all these 'listed' companies, the authorities as well as the market players, where they can freely talk to one another threadbare; on these sensitive issues.

We now have a situation where one company does not allow legal entities as shareholders but only natural persons. A few local public companies encourage expatriates to buy their shares upto a certain specified percentage. The law itself permits upto 49% foreign-shareholding in the UAE public companies.

As many of these companies have international businesses and physical presence in various parts of the world, they may find merit and commercial benefits in allowing their various stakeholders / counterparts (suppliers, staff, lenders etc.) to 'buy in' to their stock. Obviously these parties that "engage" with the company in their day-to-day business dealings, ought to understand the businesses very well and will prove to be "informed investors". Some of them might even be persuaded to become strategic investors. Ownership of shares in certain core economic sector entities such as telecom, real estate, banking etc. is a sensitive issue globally and the concerns in this regard are well-founded to warrant suitable restrictions to protect 'national' interests. .

One has to thus, strike a balance between 'opening the doors and windows' wide open or allowing them to be 'ajar' initially to carefully monitor the movements. This is part of a learning curve, steep as it may be for some, in which graduated steps and a block-building approach are always the preferred routes. Each piece of the puzzle or block can be carefully put on top progressively and one at a time as comfort levels reach towards a higher plane. Eventually, this whole exercise will have to be demonstrably 'interesting' to all the participants. Or else the expensively-built bourses could be found to operate as infrequently visited 'museum pieces'; especially if there is investor apathy. If however, there is runaway and rampant speculation, they will resemble 'casino' exchanges. Thus not only investors who freeze their holdings will be there but also some short-term players who relish the thrill of money-making through the "value and price discovery" in the market place.

Ultimately, for markets to be efficient, they will have to be tempered with generous doses of good and robust regulation, oversight and supervision. The objective should be to actively minimise alternate greed and fear; while, allowing for liquidity and up-to-date information to be captured and conveyed to customers online!.

This complex canvas collectively adds upto a huge ongoing responsibility that will always sit heavily on the shoulders of the young administrators at the helm of DFM and ADSM. Indeed, the DIFC global exchange, on the anvil can prepare itself for these tasks. As all regional 'exchanges' mature and focus on developing their markets by bringing in overseas companies to list, these moves will bring in along with them, versatile skill sets and cluster positives that can help improve the tone and tenor of the markets. A healthy flow of international companies to list on regional bourses, need not assume the form of an avalanche that will swamp small 'cap' local companies. It is imperative that the 'tonic' doses are just right in order that meteoric rises and collapses are avoided altogether.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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