Staying within the frontier may be a better place after all

So for the UAE (and Qatar) it's another six months at least of languishing with the likes of Bangladesh, Lithuania and Mauritius on the "frontier", rather than bigging it up with the "emerging" BRICs.

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But should the UAE investment community be disappointed, or even surprised, at its continued exclusion from the MSCI emerging markets index?

Chewing and talking it over after last week's announcement with financial professionals, I don't think so. UAE markets are as far away as ever from promotion to the dynamic "emerging" status, and depressingly may have to wait even longer than next year for inclusion.

On the upside, however, that may not be such a bad thing. Trends in international capital markets, and events in the geo-financial world, mean that if there ever was a time to be out of the mainstream, this is it.

Groucho Marx's famous dictum "I wouldn't want to be a member of a club that would have me as a member" doesn't quite apply yet, but that's the way it's heading.

I must admit that, along with many others, I thought inclusion this time was a foregone conclusion. Why else would MSCI take the unusual step of delaying judgement six months, if not to ultimately grant it?

The reasons given for the continued exclusion were familiar: continued problems over settlement systems and an absence of short-selling regulations (for the UAE) and foreign ownership limits (for Qatar).

In the UAE, delivery versus payment platforms have been in use since last May, and while there may be a need for further refinement, it's hard to believe that the remaining glitches could be the reason for the exclusion.

The refusal by the UAE exchange authorities to allow short-selling of stocks, common practice in most advanced markets, is rather more significant. I think it's a symptom of a UAE mindset that is hampering the creation of a real stock market here.

Likewise, the absolute refusal by Qatar to lower foreign ownership limits may tell us something about the true nature of Gulf investment culture. But really those objections by MSCI were smokescreens. It pointed to the real reason when it mentioned "liquidity", which is code for "not enough business, and the wrong type of it".

Stock exchanges, as they developed historically in the West, were successful because they proved to be the most efficient way of linking capital providers with capital consumers. That was as true of Amsterdam and London (the first exchanges) as it was of New York, which refined the model to make it the quintessential investment machine of 20th-century capitalism.

It was only later, towards the end of the past century, that western exchanges became the "casinos" they appear to be now, with market manipulation, insider dealing and short-term profit greed taking over as the main priorities.

Unfortunately, this is when Gulf exchanges were also born, and investors in the region took the western "casino culture" as the norm.

When the house was paying out, as it was most of the time until 2008, it was a great place to be. The UAE had its own bull run that ended in 2005.

Since then, however, equity markets in the region have been in the doldrums, increasingly marginalised by bond, debt and forex markets. Now they are a sideshow for real investment purposes.

Stock markets are supposed to reflect the underlying economy of a region. But the three markets in the UAE (still two too many, by the way) simply do not do that. They are dominated by bank and property companies. Energy, leisure and aviation companies are virtually all absent.

This situation also represents an ambivalence on the part of the authorities towards equity investment markets. The gleaming Dubai International Financial Centre is a great bit of PR for the Emirates, but the Government does not really want the complicated and risky business of dealing shares that goes with it.

The UAE has to now make up its mind whether it wants a responsible equity culture or not. The way the wind is blowing elsewhere may just persuade it against the idea.

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