Around the world, stock markets are consolidating. The US’ Nasdaq announced on 7 November that it is buying neighbouring Philadelphia Stock Exchange for $652m. The acquisition of the oldest bourse in the US will expand Nasdaq’s options trading platform and follows an announcement a month earlier that Nasdaq is buying the Boston Stock Exchange.

Gulf stock markets, however, are showing no interest in consolidation with nearby exchanges. Local bourses are defiantly going their own way, looking outward rather than inward for merger opportunities. As with monetary union, the idea of a common GCC stock market is undermined by regional rivalries and national ambitions to become the pre-eminent regional financial centre.

Despite the dwindling interest in such a scheme, a common GCC stock market has some appeal for investors. At current prices, it would have a market capitalisation of about $1trillion. The smallest market in terms of market capitalisation, the Muscat Securities Market (MSM), has about $19bn worth of shares listed. The consolidation of the seven relatively small local exchanges into one market would reduce costs and complexity for investors and stimulate higher levels of trading.

Red tape

A single market would offer investors the opportunity to trade in 638 listed securities and allow them to compare all stocks, bonds and mutual funds, as well as sector indices, across the region. Investors could match like for like, plotting share price moves in key stocks such as Etisalat, the pillar of the Abu Dhabi Securities Market, with Saudi Arabia’s Tadawul-listed Saudi Telecom.

“The investor would see all the stocks on one board and all the trades,” says Tarek Fadlallah, executive director of Bahrain-based Nomura Investment Bank. “It would lower costs as investors would use the same broker and custodian.”

The increased pool of stocks and traders would dilute the ability of a few large traders to determine the direction of their local markets, most marked in Saudi Arabia.

Instead of several local markets governed by differing regimes covering trading, funds, companies, mergers and acquisitions and brokerage licensing, a single market would cut down on red tape, fees and time taken to conduct cross-border trades. It would also offer the prospect of a uniform corporate governance code, synthesising investor expectations of company transparency and disclosure.

“We should have a common regulatory framework,” says Faisal Hasan, head of research at Kuwait’s Global Investment House. “The rules should be the same. GCC countries have aligned their tariffs and GCC investors can buy stocks and real estate [in each other’s markets]. The idea of a joint stock market is a little bit far fetched, but why not?”

For GCC nationals, it would remove the frustrations encountered when trying to invest in other local markets. For foreign investors, it would present uniform access to overseas fund managers who want to know they can enter and exit a market with ease. It would also suggest the introduction of an up-to-date trading platform.

Increased liquidity

For companies, a common market would expose the stock to a wider and more diverse investor base, creating increased liquidity. This is something companies listed on the MSM and the Bahrain Stock Exchange (BSE), dominated by institutions, would welcome.

It would allow for bigger companies with larger floats to list, diluting the impact of blue-chip issues such as Saudi Basic Industries Corporation (Sabic) on the Tadawul and Emaar Properties on the Dubai Financial Market (DFM), which currently sway the direction of their home bourses.

A single market would be able to cope with the interest of large, foreign funds, such as the California Public Employees’ Retirement System (Calpers), which are considering investing in the region but would overwhelm a local bourse with their buying power.

These benefits mirror the forces driving international stock market mergers. “The long-term view of the global capital markets points to the inevitability of greater co-operation and alignment of international markets,” says Nasser al-Shaali, chief executive officer, Dubai International Financial Centre.
“It would ease investor concerns and improve opportunities for cross-border capital flows, which is beneficial.”

However, the creation of a single GCC stock exchange raises issues of political clout and control. GCC regulators would have to come to a consensus on where the exchange would be located. And a central exchange would require the creation of a separate regulator and a decision on which regulatory regime it would mimic. There is little political will to resolve these issues and push on with the project.

“Stock market integration is not a political objective,” says Oscar Silva, chief executive officer of investment banking at NBK Capital, based in Kuwait. “There are other priorities. Each institution is following its own path.”

Plans for a common stock exchange discount the differing motives for setting up local exchanges in the first place, and their particular role in economies across the Gulf.

Dynamic regulators

Any combined market would be dominated by Saudi Arabian companies. The Tadawul accounts for about 40 per cent of regional market capitalisation and its companies are some of the largest in the region.

However, the Tadawul has a specific role to play in the Saudi economy. The Capital Market Authority (CMA) is widely seen as one of the most dynamic regulators, but the exchange is inward looking. The CMA only expanded the range of stocks open to GCC investors to banking and insurance stocks in September. The Tadawul is still closed to direct foreign investment and initial public offerings (IPOs) are reserved for nationals. The market is less a barometer of the local economy and more a means to distribute the kingdom’s massive oil wealth to lower-income retail investors.

“The Saudi public does not show much interest in opening up the market,” says Tom Lind, managing director of investment banking at Dubai-based AB Capital. “However, the authorities understand that foreign investors will make the market more efficient, professional and stable.”

In other markets, there are vested interests in retaining the status quo. Although the oldest in the GCC, the Kuwait Stock Exchange (KSE) is the only GCC market that lacks an independent regulator. Movement towards establishing a capital market authority has been slow. The market is responsible for policing itself. Its powers are limited and enforcement of trading rules is ad hoc. “Parties in Kuwait have entrenched interests in keeping things the way there are,” says a Bahrain-based banker.

The individual ambitions of the regional bourses are evident nowhere more than in Dubai, which is accelerating the development of its capital markets by buying in expertise, technology and branding.

Linked deals

The creation of Borse Dubai in August brings the local DFM and the offshore Dubai International Financial Exchange (DIFX) under one holding company.

The company is pursuing a series of linked deals that include taking a 20 per cent stake in Nasdaq-OMX, and Nasdaq taking a 33 per cent stake in the DIFX, bringing with it the Nasdaq brand and marketing.

Dubai is not alone in looking beyond the region for partnerships and buying stakes in stock markets overseas. Qatar Investment Authority has followed Dubai’s lead and bought a holding in the London Stock Exchange (LSE) and in Nordic exchange OMX. For both Dubai and Qatar, the LSE investments are thought to be passive financial stakes, but could offer the possibility of knowledge and technology transfer. The LSE, in turn, recently merged with Borsa Italiana.

“There won’t be any integration of regional stock exchanges,” says Henry Azzam, chief executive officer, Middle East and North Africa at Deutsche Bank. “Why would it happen now, when Dubai and Doha are buying other exchanges? They are competing to acquire the OMX. Dubai, Bahrain and Doha are competing regional financial centres.”

Informal level

There is no push at governmental level for a GCC stock exchange, and the bourses themselves have rejected the global trend towards local consolidation. But at an informal level, the markets are connected. Reflecting similar local economies, as a group, GCC markets’ performance can be distinguished from other Middle East markets.

“The GCC is starting to pull away from the rest of the Middle East,” says a senior Dubai-based investment banker. “The economies are pulling away, driven by investment opportunities. North Africa and the Levant are looked at as emerging markets. The GCC has become a market on its own.”
Regional interconnectivity was highlighted by the contagious stock market correction that began on the DFM in late 2005. The Tadawul followed the same course in more dramatic fashion, crashing in March 2006 and dragging the faltering DFM down further and the Doha Securities Market with it. The crisis rippled across the region because of the high level of cross-border investment and the large number of cross listings.

Kuwait-based Global Investment House, for example, is listed on the KSE, BSE and DFM. The DFM has rallied since September and is up 32 per cent since the beginning of the year. The Tadawul appears to finally be in consolidation phase after more than 18 months of correction, with the index up 14 per cent over the period.

In October, the CMA announced plans to stage an IPO of shares in the Tadawul. It will follow the DFM, which was the first GCC exchange to go public when it sold off 20 per cent of its shares a year ago. In this new era of stock market privatisation, a pan-GCC entity is even more remote.