At the time of its flotation in March 2006, the listing of Saudi Prince Alwaleed bin Talal’s Kingdom Hotel Investments on the Dubai International Financial Exchange (DIFX) was hailed as a milestone in the development of Dubai’s I nternational stock exchange. This, the first listing on the nascent exchange, had come from one of the region’s highest-profile business figures and an investor of international renown. It was the perfect
marriage of the international and the local that the DIFX was hoping to promote.

Yet, four and half years later, Nasdaq Dubai, as the rebranded DIFX is known, is floundering. The latest blow to the exchange is Prince Alwaleed’s announcement that he is buying back Kingdom Hotel from Nasdaq Dubai, at $4.95 a share, a 46 per cent discount from its listing price.

Several other companies are also walking away from the exchange, and even Dubai government-owned corporate champion DP World is planning to also list its shares on the London Stock Exchange in a bid to boost its valuation. DP World has long complained that the market is undervaluing it.

I think institutional investors would buy more if they could hedge more effectively

Jeff Singer, CEO, Nasdaq

“Nasdaq Dubai hasn’t seen the level of success that was anticipated several years ago and that has been evident to everyone, because both the number of listings on the exchange and the overall liquidity have been limited,” says Fahd Iqbal, head of research at Egyptian investment bank EFG-Hermes.

International aspirations

At the time of its launch in September 2005 the exchange planned to address a number of issues facing capital markets in the region - the lack of transparency, retail investor domination and low participation of international and institutional money. Launching the exchange seemed the next logical step after the emirates’ success at developing its status as an international trading hub.

“Nasdaq Dubai was established to tap into an international clientele - and institutional investors especially - given that regional equity markets had been retail-dominated,” says Ghida Obeid, equity researcher at Dubai-based investment bank Shuaa Capital. “However, it could not reach the liquidity levels required to ignite market depth.”

“Nasdaq Dubai was launched as a new capital market that would fill in the time zone gap between Singapore and London,” says Iqbal. “Clearly it has fallen very short of that target.”

Today, only 16 companies are listed on the exchange and only three - DP World, Depa Limited and Fortune Management - are traded. Despite being the most actively traded stock on the market, DP World said in January it was also listing on the London Stock Exchange in order to tackle “its continued disappointment with the market’s valuation of the company”.

If the Kingdom Hotel delisting was a symbolic blow to Nasdaq Dubai, the DP World move is more serious. The ports operator represented 90 per cent of total trading on the exchange in 2009, and 80 per cent of the total traded values.

Shortly after DP World’s announcement, Citigold Corporation, an Australian gold mining company, revealed on 19 January that it was going to withdraw its shares from a secondary listing on Nasdaq Dubai, citing the low turnover on the exchange.

“In 2007, when the company listed in Dubai, there was an expectation of an expanding exchange. That has not materialised and it now has less than 20 equity listings,” read a statement released by Citigold, which has since withdrawn from the bourse. Analysts in the UAE also say that interior contractor Depa has expressed its disappointment with its valuation on the exchange.

To address the issue of liquidity on the exchange, Dubai Financial Market (DFM), part of Nasdaq Dubai’s parent company, Borse Dubai, has announced in December 2009 a $121m take-over offer for Nasdaq Dubai.

Under the terms of the buyout Nasdaq Dubai will gain access to DFM’s 548,000 retail investors through a harmonising of their trading accounts, in the hope that they will buoy trading volumes. DFM is also encouraging Nasdaq Dubai-listed companies to change their listing currency from dollars to dirhams, as a fillip to domestic traders. The moves are all part of a wider initiative to harmonise trading onto the DFM platform, although Nasdaq Dubai will remain a separately branded and regulated exchange. The exception will be derivatives products, which will continue to be traded on the Nasdaq Dubai platform.

The deal is a tacit admission that the exchange has failed to generate adequate trading volumes and that costs need to be stripped out of the business.

“I believe the most important aspect of the acquisition will be on the cost-cutting side,” says Germaine Benyamin, an associate at the Dubai office of  HC Brokerage. “Now investors have access to a wider base of investment options, but they can do it through their existing brokers, with the same execution cost for trading on both exchanges.”

If the consolidation succeeds in boosting volumes on Nasdaq Dubai it may be the boon the exchange needs to ensure its future. A more liquid Nasdaq Dubai would have substantial advantages over its competition in the UAE for both investors and listed companies.

“Nasdaq Dubai allows companies to float just 25 per cent of their shares in contrast to other bourses,” says Steve Drake, a partner in the PWC Capital Markets Group in Dubai. “In particular, family businesses are reluctant to list on either the Abu Dhabi Securities Exchange (ADX) or the DFM, because in doing so they have to list 55 per cent of their stock and many don’t want to lose control. I’ve talked to certain entities within the UAE who are interested in listing and they cite that as an important reason.”

The future for Nasdaq Dubai is far from certain. Perhaps the only thing the past four and half years have proven is that the UAE cannot sustain three stock markets. But local analysts say that a full merger is unlikely.

“I can’t see it being fully absorbed, because then it would be deemed to have been a complete failure,” says one local analyst. “There are also practical considerations, because Nasdaq Dubai operates in a different jurisdiction.”

Obeid describes the merger as “paving the way for Dubai to have two complementary, rather than competing, exchanges”.

Derivatives market

Meanwhile, Nasdaq Dubai will concentrate on new product areas. “A key focus right now is to aggressively roll out the derivatives market,” says Jeff Singer, chief executive officer of Nasdaq Dubai. These products allow investors to better hedge their risks, and are not yet widely available in the region.

“I think institutional investors would buy more if they could hedge more effectively, and with that hedging should come a lot more liquidity and stability,” says Singer.

“We are also looking at building up primary debt listings, because we think that the bond market is going to stage a strong comeback.”

The exchange already has about 30 debt and sukuk (Islamic bond) products listed. In December last year it announced the listing of
a $500m sukuk issued by the US’ GE Capital, a division of General Electric, its first sukuk listing from an international company.

A deal by Borse Dubai with the US’ Nasdaq and Nordic stock exchange group Nordic OMX has given the Dubai market access to some of the world’s best stock market technology, giving it a major advantage over regional rivals.

Nasdaq Dubai has also made significant steps in advancing the region’s regulatory regime and, perhaps, with access to the liquidity offered by the DFM’s retail investor base, it will be able to secure its future.

The irony is that the future of the platform launched to help develop a domestic institutional investor base through the participation of international institutions could now hinge on local retail investors.