Trading volume on the Abu Dhabi Securities Exchange increased nearly 40 per cent in the first half of the year, helped substantially by foreign investors. They were net buyers of local shares and accounted for 30 per cent of trading, the exchange reported earlier this month. That is good news after several very difficult months for markets everywhere, but it is not necessarily a reason to jump in and start buying. Other information contained in the exchange's announcement suggests that much of the foreign activity amounted to speculation, not the sort of long-term investment that is a hallmark of thriving, expanding markets.
Tom Healy, the exchange's chief executive, said in the announcement that buying by foreigners, meaning people and institutions from outside the Gulf Cooperation Council, was "influenced by an appreciation for the positive long-term economic outlook for Abu Dhabi". That conclusion seems to be contradicted, however, by another statistic - the 4 per cent of total capitalisation in the hands of foreigners.
That figure seems quite meagre for a group that did 30 per cent of the trading. A reasonable inference is that many foreigners are buying and selling in Abu Dhabi, not buying and holding. Exchange officials did not directly address the gap between trading volume and ownership by foreigners when asked to comment, but a spokesperson said in an e-mail that "a certain amount of trading volatility from all types of investors is not unusual given current market conditions around the world". Nevertheless, she added, "turnover on [the Abu Dhabi exchange] generally this year has been relatively low".
Indeed, the discrepancy is not as wide as it may at first look. Government entities and other large domestic shareholders comprise a big proportion of the number of shares outstanding for the 66 listed companies. Let's say it's two-thirds; if you eliminate them from consideration, then overseas investors account for 12 per cent of the free floats. But that still leaves a gap up to 30 per cent. So much trading volume for such little share ownership suggests that foreigners are not all that committed to the emirate's long-run economic and commercial prospects but are looking instead to make a quick score in a beaten-down market.
It would not be the first time. Emerging stock markets have been plagued by flows of hot money from abroad for decades. The ups and downs in capital flows can wreak havoc on a developing economy, creating fiscal and monetary imbalances and promoting instability of various sorts. The emirate's fiscal strength would mitigate the damage; a local version of the Mexican peso and Asian crises of the 1990s is unlikely and maybe impossible. But a large, stable base of foreign investors undoubtedly would help the Abu Dhabi stock market to thrive and provide investors in it, wherever they call home, with strong returns over the long haul.
One veteran professional investor, Komal Sri-Kumar, chief global strategist at TCW Group, a subsidiary of the French bank Société Générale, offered some steps that Abu Dhabi, or any other GCC market, could take to attract foreign investors and keep them. First on his list is "clear rules on corporate governance", including information on companies' ownership structures - is there a controlling shareholder, how big is the free float? Control by a single large owner could leave minority shareholders with no say in how the business is run, and a small free float could restrict trading, creating a risk, he said, that "I get sucked in and may never get out".
Mr Sri-Kumar would advise companies to seek listings in New York, London and elsewhere as American or global depositary receipts. That would go a long way to allaying qualms about governance issues because companies that are listed in those markets have been deemed to comply with local rules on accounting and shareholder rights. Another key is expansion of mutual funds, which would create competition among managers to find the best companies in Abu Dhabi, plus their counterparts in other emirates. Mr Sri-Kumar also would like to see an exchange-traded fund, a low-cost index product that could be traded throughout the day. "Give me actively managed [funds] and a passively managed one and let me decide which I want," he requested.
A stock will not be a good buy just because someone from overseas shows up with a satchel full of cash to invest. The best prospects will continue to be companies with improving sales and earnings and activities in sectors of the economy that are growing more rapidly than others. There is no assurance, either, that other foreign investors would find these developments as sanguine as Mr Sri-Kumar does. But they probably would, as they are very sensible. They certainly couldn't hurt.
Investors should be on the lookout for evidence of these developments and, if they spot them, consider upping their shareholdings in the market for two reasons: The weight of persistent buying and long-term holding that is likely from abroad would put a floor under prices and, more important, it would be a clear sign that the market and the companies traded on it are being run well and in the interests of all investors.
Conrad de Aenlle, who is based in Los Angeles, has covered business and investment topics for nearly 20 years
