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Fund managers and brokers in UAE seek market making

Sources who were present at the meeting told Khaleej Times the group of fund managers and brokers who met yesterday will seek a freeze on initial public offerings (IPOs) for the next three months while Government's intervention will be sought in scheduling the future IPOs in such a manner that a crowding of issues will not drain the market of liquidity.

“The market is going through a crisis situation which needs to be urgently addressed. All of us at the meeting were equally concerned about the high volatility. We need to address the fundamental issues which are affecting the investor confidence,” said a DFM broker.

The meeting called by the National Bank of Abu Dhabi, agreed that a committee of fund managers and brokers would finalise their recommendations and then present the suggestions collectively to the government.

A significant suggestion that came up at the meeting on Wednesday was the creation of a market making mechanism through the support of government. Although there was some sort of consensus at the meeting that a government supported fund should be created to function as a market making, or stabilising mechanism. A number of fund managers and brokers later told Khaleej Times that such a fund would lack credibility and there will be conflicts of interests as the government holds stakes in a number of listed companies.

“How can a government backed fund work as a market maker when some of the most liquid companies such as Emaar, Amlak and du have significant government shareholding? There is a clear moral hazard in such a move,” said a fund manager.

Many leading fund managers and brokers felt that the market making function should be left to funds and well capitalised brokerages. ADSM and DFM should designate a few market makers purely on merit.

Since the beginning of the year, the Abu Dhabi Market Market Index declined by 28.46 per cent while the DFM index slipped close to 48 per cent. The sharp decline in the markets have been largely attributed to shortage of liquidity resulting from huge demand for frequent local and regional IPOs. For instance, in March this year two IPOs from Tamweel and Emirates Integrated Telecommunications Company sucked out more than Dh650 billion from the market.

The huge demand for IPOs combined with easy leverage offered by the banks have resulted in large movement of funds in and out of the market resulting in wild fluctuations in the market indices. To control the impact of such fund movements on the market, leading fund managers have suggested that the government should control the frequency of IPOs.

Analysing different suggestions put forward by fund managers and brokers, independent analysts said, the answer to the market's woes lies more in expanding the depth of the market by opening up the market for a larger investor base while reducing the holdings of large investors including governments and promoting families.

“The easy leverage and current system of pricing IPOs at par are creating unreasonable demand for new issues. If the issues are priced realistically, demand side impact will be less on the overall liquidity in the market,” said an analyst.

In yesterday's meeting the broking fraternity in the country also urged the government to speed up the share buyback law and to encourage state funds, which control the country's oil wealth, to become long-term investors in stocks.

Meanwhile the UAE shares slipped further yesterday with Dubai Financial Market Index closing 8 points (1.4 per cent) down to 541 and the national benchmark NBAD General Index slipping 53 points to 12,240. While Emaar closed 1 per cent down at Dh13.80, Amlak and du posted marginal gains. Across the two bourses banking sector shares continued to experience selling pressure.