On DFM, now is the time for market makers to cash in
Dubai’s decision to list government and semi-government companies is expected to take Dubai’s financial market to the next level. A stock market needs the presence of blue chips to attract investors. Currently, banking and real estate constitute an important part of the index, which is why the new quotations will allow better sector diversification.
In the Middle East, large SOEs are seen as stable, well-managed, and shareholder-friendly. Already, reports suggest that DEWA (Dubai Electricity and Water Authority), valued at $ 25 billion, will be the largest list on record in the emirate for now.
Equally important is the decision to create a MAD 2 billion market making fund, which will help increase liquidity in the Dubai stock markets. On DFM or generally in the Middle East, trading volumes are still low by international standards, and even blue chip stocks suffer from low liquidity. Low volumes increase market volatility and also increase the severity of a stock market crash.
On the other hand, good liquidity will attract international investors with deep pockets, as it helps to reduce transaction costs and allows easy entry and exit of trades. It’s a chicken-and-egg scenario that can only be solved by appealing to market makers. The move from Dubai will strengthen DFM’s long-term profile and make it more representative of the local economy.
And finally, it puts an end to the rumors of merger between ADX and DFM. Instead, the new round of initiatives shows the Dubai government is serious about DFM at higher heights.
So that brings us to the next big question; Which companies will be the immediate beneficiaries of the current movement. The most obvious is the Dubai financial market, and stock market shares have already risen 39% in recent trading sessions. Volumes on the stock exchange will benefit from a considerable increase, and revenues are already on the rise and should reach 270 million Dh in 2021 and against 187 million Dh in 2019.
The listing of large companies like DEWA should be another tailwind. In addition, DFM, with a market capitalization of Dh 11.12 billion, is fundamentally sound, with a net cash reserve of Dh 3.2 billion.
Two other companies that will benefit are BH Mubasher and Al Ramz Securities, which offer brokerage services. BH Mubasher was already showing good growth in 2020 when it posted the highest turnover since its inception. The company’s vision is to be a full-fledged boutique investment firm. It is the first company on DFM to obtain a short-term margin trading license and is also approved as a Securities Lending and Borrowing Agent (SLB).
Al Ramz also turned around its financial performance, with revenues growing strongly in the last quarter. It acquired the market making business of Shuaa Capital in 2020. With Dubai very focused on improving transaction volumes, the market making business is expected to thrive. The company also plans to repurchase nearly 10 percent of its issued shares, which gives some reassurance.
These companies have an exciting road ahead, and investors should watch …