The UAE and Qatar will retain their frontier market status after global indexing company MSCI decided against upgrading them to emerging markets.

As a result, the Dubai Financial Market (DFM) dropped 0.57 per cent to 1385.07 on 15 December, the lowest in six weeks. Abu Dhabi Securities Exchange (ADX) opened 0.24 per cent lower.

MSCI extended the review period for both countries from June this year until mid-December, to give market participants enough time to adjust to the implementation of the new delivery versus payment (DVP) models on the Qatar Exchange, DFM and ADX.

“This is disappointing news for Qatar and the UAE. However, it is important to differentiate between the two results,” says Georges Elhedery, head of Global Markets at HSBC Mena.

Feedback from investors in the UAE was apparently positive, according to the MSCI but there are still concerns over the effectiveness of the new framework to ensure safeguarding of assets in certain circumstances. Failed trades where a forced sale of assets, without the owner’s consent remains a possibility.

“This review notes the generally positive feedback about how it (UAE) is operating but acknowledges the concerns that investors still have on some specific aspects of the model, involving potential forced sell out. This reflects the extremely risk averse sentiment that investors have towards markets now,” says Elhedery.

As for Qatar, the foreign ownership limits were and continue to be a major concern. Qatar has made little effort in increasing these limits, but the bourse has encouraged firms to open up to foreign investors.

This continuing frontier status means international emerging markets funds that track the MSCI Emerging Markets Index still cannot access the UAE and Qatar markets. The next review will be in June 2012.

“It is important that the markets continue to work towards addressing these issues and continue to raise awareness among the international investor community,” says Elhedery.