GCC markets will not be able to stage a proper recovery until retail investors have paid off their debts, according to the head of Nasdaq Dubai.

“We are currently in a bear market with trade values and volumes down across the entire region,” said Jeff Singer, chief executive of Dubai’s international stock exchange Nasdaq Dubai, speaking at MEED’s Middle East Capital Markets 2010 conference.

“Many retail investors took on a lot of debt and until this is paid off, it will take a while for markets to recover. Even though valuations are low, they’re staying away from investing on the exchanges.”

Singer believes there are four key strategies, which could help overcome the low levels of liquidity.

“The UAE exchanges should introduce short-selling to help investors benefit from the market downturn and help keep markets liquid,” says Singer. “One of the main weaknesses of the GCC is that you can only make money when there is a bull market.” 

Singer also believes that increasing free-float by allowing private placements on public markets would be beneficial.

“Currently, only about 20 per cent of listed GCC companies are properly traded,” he says. “The fact that there is small free-float and they only have a few shareholders means there isn’t much trade taking place.”

Thirdly, changes in foreign ownership limits and account structures should help address key inhibitors to the exchange’s development, thereby increasing its chances of being upgraded to an ‘emerging’ market classification by global index provider MSCI.

In June, MSCI renewed its ‘frontier’ status for the UAE, ending hopes of an influx of foreign capital. The index provider cited the dual account structure and the stringent foreign ownership limits as “major concerns”. Some analysts say that a reclassification to emerging market status could attract $5bn in new capital into the UAE alone.

Fourthly, Singer called for a merging of liquidity pools, stating that capital markets require scale to be successful.

In December 2009, the DFM announced a $121m takeover offer for Nasdaq Dubai in a bid to improve liquidity. Under the terms of the buyout, Nasdaq gained access to DFM’s 548,000 retail investors through a harmonising of their trading accounts.

“The merger was completed in July this year and has already produced some notable results,” said Singer.

“DP world has been in the top five stocks of both exchanges on 52 per cent of trading days, by traded value.  Also, traded value rose 31 per cent in the first 9 months of 2010 at Nasdaq Dubai compared to the same period in 2009.”

The merger has given improved access to retail investors, enabling them to trade on both markets using their National Investor Number. Today, nearly all Nasdaq Dubai brokers now include all large DFM brokers. 

Singer also spoke on the long-touted merger of the Abu Dhabi Securities Exchange (ADX) with the DFM.

“If the UAE exchanges were to consolidate, then the cost of transactions would go down significantly as the brokers could all be trading as one market,” said Singer.

“There are already around 25 per cent less brokers in the market than the 105 active in 2008. On top of that, there are only about 6 stock that are actively traded on the ADX today.”