Standard & Poor's is set to launch an index of leading blue-chip stocks in the Arab world, a move that may help to tempt back foreign investors fleeing instability in parts of the region.
The index will aim to attract exchange-traded funds (ETFs), which track such indexes around the world and account for about US$1.5 trillion (Dh5.5 tn) in global equity investment.
"We are building a benchmark now for funds to invest in the region when the economy improves and oil prices pick up," said Fadi Khalaf, the secretary general of the Arab Federation of Exchanges, which counts 16 stock markets as its members including all GCC states, and which is helping to establish the index.
"This will be the first index in the region represented by the biggest index provider. It will make it much easier for international funds wanting to invest in the region as they won't have to deal with 16 Arab clearing houses."
S&P and the Arab Federation are set to announce the launch of the index today during the federation's annual conference in Abu Dhabi.
The news should provide a boost for regional markets as expectations build ahead of a decision expected this month by MSCI over whether to upgrade the UAE and Qatar to "emerging" market status. Any promotion from their current "frontier" classification would open both countries to a potential wave of new liquidity and drive index-fund investment.
Arab stock exchanges have suffered a torrid time this year. Valuations have declined and volumes crashed in line with market confidence that was shaken by the Arab Spring uprisings and the euro-zone debt crisis, causing some foreign investment to exit the region.
The EGX 30 Index, the benchmark index for the Egyptian Exchange, lost 44 per cent of its value in the year up to Wednesday.
In Saudi Arabia, the Tadawul All-Share Index is down 8 per cent, with 15 per cent shaved off the value of the Dubai Financial Market General Index over the same period.
Exchange-traded funds track a basket of assets, such as index funds, and have grown to become the biggest single collective investment vehicle in the world.
Global providers such as Blackrock and PowerShares offer ETFs that track the performance of major benchmarks such as the S&P 500, the Dow Jones Industrial Average or the Euro Stoxx 50.
ETFs, however, have yet to fully take off in the Middle East, apart from limited activity in the UAE and Saudi Arabia.
Any funds that want exposure in the region usually have to negotiate with the clearing house of each country's stock exchange they want to invest in.
The S&P Arab 500 index should streamline the process and enable ETFs to track a single index, offering them exposure to the biggest stocks in the region.
"It is likely to make the most difference for retail or smaller investors. For smaller investors, at the moment, it can be difficult to construct a portfolio of assets in the region," said Paul Gamble, the head of research at Jadwa Investment in Saudi Arabia.
Criteria for selection of stocks within the index is being decided by S&P and the Arab Federation.
Only exchanges using international data providers will be featured in the index. As a result, exchanges in Syria, Iraq and Libya will be excluded initially, with their positions to be reviewed by S&P once they appoint an international data provider.