Volatility has hit the UAE and Qatari stock markets in the run-up to their official upgrade to emerging markets status on 1 June by US index compiler MSCI.

Stocks rose rapidly in the run-up to MSCI’s announcement on 14 May, when it disclosed the 19 regional names that it would include in the index. But no sooner had the lucky names been announced than the heavy sell-offs began. The losses were partly erased on 21 May, but exchanges still closed the week in the red.

With a potential seasonal summer slowdown looming, volatility is likely to continue as investors look to book profits while others swoop in to take advantage of better buying opportunities. Meanwhile, passive foreign funds that track the emerging markets index will start including the UAE and Qatar in their portfolios during the next six months.

The volatility has exposed the speculative nature of trading on the region’s markets, which are dominated by retail investors seeking quick profits. Attracting foreign investors with a longer-term approach to investments, which the MSCI upgrade could contribute to, is key to stabilising the markets.

But with many stocks having reached extremely high valuations and factoring in expectations for future growth, the exchanges will need to attract fresh listings if they want to increase their appeal. New listings could suck up some of the liquidity in overbought stocks, and, if they meet MSCI’s criteria, may become candidates for emerging markets inclusion. 

Other improvements such as the stricter enforcement of corporate governance, enhanced efficiency in trading and harmonising the markets could also help alleviate investor concerns. While some initiatives have been launched in recent months, concrete progress has yet to be made on other proposals such as the planned merger of the Dubai and Abu Dhabi exchanges.

Until there is more clarity on these improvements, markets are likely to remain vulnerable to speculative activity.