What’s in a classification? Just a label or a game changer?

by John Martin St.Valery, Founding Partner of The Links Group

In May 2014, one of the most significant economic and business changes in the financial status of the UAE and Qatar was announced. We believe this change will have long reaching positive consequences for the region.

MSCI Global Equities Index, who provides vital support tools to the global investment community, upgraded their classification of the UAE and Qatar from Frontier to Emerging Market status.

 So what…? Is it really such a big deal and does it make any difference?

 We have considered what practical difference this would really make, and indeed what is the criteria and what are the fundamentals for these classifications?

 In broad terms, Frontier Markets have…

  • Less developed economies in terms of legal, compliance, ethical and governance environments.  They may have developed quickly and the accepted and expected frameworks and structures that the more developed economies, especially in the West, have taken decades, sometimes a century, to create, have not had the time or the local skills and experience to put in place.
  • No or limited public stock exchange. There was no demand when there was little trading between businesses that are government owned or controlled.
  • Investment tends to be illiquid and a lack of governance and transparency has resulted in a lack of trust from the global investment institutions.
  • Political risk. In many cases this is perceived risk, but the disruption seen in many economies over recent years has added to this negative perception and therefore lack of confidence.
  • Currency risk, again perceived, could be caused by political instability, but also has been caused by some economies being so over leveraged in the past that economic nervousness exists.
  • These risks can cause high peaks and low troughs in economic performance. High gains & high losses for investors.

By Contrast, Emerging Markets have sharpened up all of their economic and business standards to become sustainable economies with minimized risks but still the potential with higher returns as growth rate is greater than other economies.

 Key indicators are…

  • Demonstrable and measurable reversal in all of the above areas especially in regards to governance, compliance, laws which have been repeatedly tested and robustly enforced and financial regulation.
  • Significantly greater liquidity and stability across all sectors which are now attracting A grade inward investment and businesses M&A activity and increase in IPOs due to growth of entrepreneurial activity and private control and the establishment of a stock exchange
  • Higher level of diversification in economy and on the markets, which reinforces stability and reduces some of the risk and volatility.

Emerging and Frontier markets both offer the prospect of higher returns with higher risk, but Emerging markets are more stable and sustainable. The economies of emerging market countries have achieved a foundation level of development, while frontier markets represent the least economically developed nations in the global marketplace. However, this lack of development provides a level of investment diversification that cannot be duplicated in more mature markets. Both types of markets also carry several types of investment risk, including market, political and currency risk, as well as the risk of nationalisation.

In relation to the UAE and Qatar specifically, the unapologetic drive for foreign investment is crucial for the economy and non-dependence on natural resources. From a global perspective, the perceived risk (politically, economically) is greatly reduced when companies consider the upside of relocating wider regional businesses to the UAE thanks to the market status change.

Add this to the Dubai’s government vision to build a smart city and a knowledge economy, the need for global skills and experience in an environment of so much opportunity presents very interesting and positive phase for this region.

More than a label, definitely a game changer and certainly another barrier to entry lowered in our view.

 


John Martin St Valery

Founding Partner

The Links Group

www.linksgroup.com

 

 

Article by Links Group on Dec 29th 2014
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