Trading in the Middle East: The Road to Mecca

In the midst of political turmoil and civil unrest, the race is on in the Persian Gulf to overhaul market structures and increase foreign investment. In the search for alpha, growing numbers of investors are increasingly looking to the emerging market economies whose higher GDP growth rates present some of the most attractive opportunities available in current market conditions.

Two things will trigger major investment and trading shifts in the Gulf region: MSCI re-classification and Saudi Arabia. Two of the six Gulf countries, Qatar and the UAE, are in line to have their MSCI Index classification changed in June 2011 from “frontier” to “emerging market” status. Secondly, Saudi Arabia, which will dwarf the main players in the GCC world if it chooses to open up to foreigners wanting to invest in its massive infrastructure, and re-invent its market place.

Whilst achieving the MSCI re-weightings will no doubt boost interest and fund flows to the region, the Gulf markets are legacy retail market structures that do not fit well with the current western institutional flow model. Every GCC state must therefore implement changes to its market to attract investment but the extent and pace of progress are largely based on the political and cultural appetite for change. Individual exchanges are expanding electronic trading, upgrading platforms, changing rules and launching initiatives to increase liquidity. In addition there are efforts to create a pan-regional exchange, as they face the dilemma of survival of the fittest or safety in numbers.

Market structure change is no mean feat in a region comprising sovereign nations that agree then disagree constantly, have political differences, and very different cultural views all which stand in the way of strategic business alignment. But the exchanges know that merely tinkering around the edges of market structure will not solve fundamental problems of market access and lack of liquidity. Yet in comparison to the developed markets trading over hundreds of years, the speed and depth of change in the GCC market structure has been extremely impressive.

Trading in the Middle East: The Road to Mecca

In this Vision note TABB Group looks at the efforts being made in the Middle East to transform their markets and the opportunities and hurdles they face.