Dubai’s stock markets declined following Morgan Stanley Capital International’s (MSCI) decision on 21 June to extend its review period until December 2011 for a potential reclassification of the UAE from a frontier market to an emerging market.

The Dubai Financial Market (DFM) dropped 1.8 per cent and Nasdaq Dubai dropped 1.4 per cent on 22 June. The Abu Dhabi Securities Exchange (ADX) increased slightly with gains of 0.03 per cent.

The six-month extension is “unusual in the sense we have a normal annual cycle”, says Remy Briand managing director and global head of index and applied research at MSCI. “In the case of the UAE and Qatar assessment, given the major changes in infrastructure that were implemented very recently, we felt it would make sense to extend that period.”

The UAE may have undermined its chances of becoming an emerging market by implementing the required delivery versus payment (DvP) system too close to the assessment date.

MSCI will focus on the experience of international investors using the new DvP system now in place prior to its second assessment in December.

The other shortfall for UAE bourses was the cap on foreign ownership levels. “There have been cases in the past where international investors have been unable to access a number of stocks,” says Briand. “We hope that levels of foreign ownership in the UAE may be increased, but the issue is not as problematic as Qatar,” he adds.

Currently, foreign investors are limited to 49 per cent ownership. Under UAE law, only nationals are entitled to full ownership of companies that operate outside of free zones. For now the authorities have shown no intention to increase foreign ownership levels.

An upgrade would have attracted more liquidity to the exchanges and opened them up to more international investment, joining Egypt and Morocco as the only emerging markets in the region.

While there have been no protests in the UAE, the Arab uprisings has still had a negative impact on the markets in the country.

The DFM has dropped by four per cent since the beginning of the year as a result of the regional unrest.

The average daily volume of shares traded in Dubai dropped down to 116 million in the first quarter, the lowest in the past six years.  Abu Dhabi has fared slightly better with 117 million shares traded, but still a 27 per cent drop compared to the same period in 2010.

While the prospect of the upgrade buoyed the bourses last week, the day before the announcement the ADX lost 0.2 per cent as a result of cautious trading.

The UAE has struggled to return to pre-financial crisis levels. The value of stocks traded on UAE bourses has fallen drastically since 2008. So far over AD36bn ($9.8bn) has been traded this year, significantly short of the AD530bn traded in 2008.