September 1 is a red letter day for all who believe in the cult of equities. That is the launch date of Nasdaq Dubai Futures, a new development in UAE markets and a bold attempt to seize an opportunity in securities that has been misunderstood and underexploited in the past.
Under Hamed Ali, its chief executive, Nasdaq has an opportunity to offer regional and international investors products that they take for granted elsewhere in the world but which have not gained traction in Arabian Gulf markets, with the exception of Kuwait, which has been trading derivatives for the past couple of years.
At least part of the thinking must be that if Kuwait, with limited appeal to global investors and far less liquidity than the UAE, can make a go of derivatives, markets here should not be left behind.
Trading in one-, two- and three-month contracts will commence, initially for seven individual stocks including some of the biggest corporations in the UAE, such as Aldar Properties, DP World and Etisalat.
Emaar Properties, Arabtec, Dubai Islamic Bank and Dubai Parks and Resorts make up the rest of the list, which is a fair reflection of the fundamental UAE economy. (An energy company would be a nice addition.)
This is not the first time a futures market has been attempted in the UAE. Nasdaq Dubai launched something similar in 2008, at the height of the financial crisis – but the timing was bad and broker interest limited. It faded away in 2011.
This time, the auguries look better. Global and region markets have had a good time throughout the year and Nasdaq Dubai has attracted solid interest from six of the top brokers in Dubai, with Shuaa Capital as market maker. That amounts to significant buy-in from the financial community.
Derivatives trading has sometimes got a bad name, with critics throwing the “speculation” charge at it. But it is a normal and accepted part of trading in all sophisticated markets, allowing investors to take a stance on future share price movements while reducing potential exposure to losses.
It enables investors to leverage up their initial margin commitment, to “short” stocks by selling in advance, to hedge their full equity market portfolio and to benefit from arbitrage between futures and underlying stocks. In volatile markets, derivatives give traders the ability to smooth out the effects of short-term fluctuations over a longer time frame, reducing the immediate hit to their portfolios.
Of course, in extreme market circumstances derivatives trading also exposes the investor to the effects of short-term margin calls. But if there was no downside risk, it wouldn’t be a stock market, would it?
Foreign investor interest in UAE markets has grown since the country entered the MSCI ranks of emerging markets two years ago. The new market will be a standardised and regulated platform, reducing the risk to investors of customised and unregulated products.
If successful, Mr Ali says that Nasdaq Dubai will expand the market to include other stocks, including those listed on other Gulf markets, as well as stock options, the next level of sophistication in derivative trading.
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