By Robin Wigglesworth

Published: July 16 2008 15:55 | Last updated: July 16 2008 15:55

What is smaller than Cyprus, less active than Mauritius and thinner than Malta? The answer is the Dubai International Financial Exchange.

In the first half of 2008 the value of shares traded on the DIFX was $1.1bn, less than the total on the Cyprus stock exchange in the same time period. Only 17,600 individual trades were executed – almost half as many as on the Mauritius exchange. Three years after it opened, only 14 companies have listed on DIFX; Malta is broader with 18 public firms.

It was supposed to be so different. DIFX demands international standards of governance and transparency and is supposed to attract leading companies. DP World, the ports operator that acquired P&O of the UK, listed on DIFX last year, raising $5bn in the region’s biggest initial public offering. But the shares have flattered to deceive.

“It has been a disappointment,” says Ali Al Shihabi, chief executive of Dubai-based Rasmala Investments. “We used to say it required a major listing to attract liquidity and achieve scale, but [the DP World listing] didn’t have the impact we hoped for.”

Two factors have contributed to the lethargic first three years. First, the stock market tumble of 2006, when the MSCI Arabian Markets index lost nearly half its value, followed by a credit crunch that removed incentives to list.

Second, Gulf exchanges have always been dominated by retail investors. Authorities have tried to develop markets by educating investors and encouraging institutions, but retail investors are still responsible for the bulk of trading in the Arab world – and are absent on the DIFX.

Rather than par-value subscriptions, DIFX listings have been book-run. But in a region where undervalued subscriptions are the norm, and privatisations are used by governments to transfer wealth, expectations of huge returns at the time of listing have become entrenched.

“It’s all happy days on the first day, but that sort of capital raising is highly inefficient for a company,” says Sean Gardiner, head of Middle East research at Morgan Stanley. “Speculators might have expected something like that to happen to DP World. When it doesn’t, they run away and never want to be there again.”

Retail investors will probably have to be induced back to the DIFX. One solution could be to extend opening hours and open on Sunday, in line with the Gulf working week.

A deeper, wider market is also necessary, not least to attract institutional investors, for whom trying to obtain an allocation in a company with a freefloat of a few hundred million shares “is a waste of time”, says Mr Gardiner. Through its parent company Borse Dubai, the DIFX has entered into a partnership with Nasdaq-OMX, hoping to boost listings and trading. It plans to unroll a derivatives trading platform in September.

An exchange official says investors trade “millions of shares daily” via the DIFX’s close links with international and regional brokers. “However, not all issuers seek high trading volumes. Some have preferred to carry out an IPO with a small number of institutional investors who aim to hold the stock long-term.”



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