Index provider MSCI has assessed the UAE and Qatar stock markets as being ‘frontier’ status, ending hopes of an influx of foreign capital based on a reclassifcation to the more stable ‘emerging’ market level.

The index provider said that institutional investors often have to establish seperate accounts for trading and holding shares in both Qatar and the UAE in order to mitigate the risk from local brokers having unlimited access to the trading accounts. The frequent use of dual account structures was one of the main reasons for the failure of the two markets to be upgraded, it said.

Both Qatar and the UAE will remain under review for a potential reclassification to emerging market status in the 2011 report. International investors often use the index as a guideline for where they deploy capital, with less risky classifications attracting more international investments. Some analysts say that a reclassification to emerging market statuts could attract $5bn in new capital into the UAE alone.

“The need to set up and operate with a dual account structure is still a major concern to a number of international institutional investors and is incompatible with general emerging markets standards,” said MSCI in its 2010 Annual Market Classification Review with reference to the UAE.

The use of such segregated accounts “results in the significant operational burdens of having to transfer shares from one account to the other prior to trade”.

MSCI also said that international investors remain concerned about the stringent foreign ownership limits imposed in both GCC markets, but added that it continues to be encouraged by the planned increase of this limit in the UAE.

“The recent economic and financial turmoil may have affected the speed of progress on this front as well as opened a broader rethinking on the structure of UAE stock exchanges,” noted the index provider.