Gulf News - On DFM, this is now the time for market makers to cash in

Vijay Valecha, Special to Gulf News November 08, 2021

Dubai's decision to list government and semi-governmental companies should enable Dubai Financial Market to leapfrog to the next level. A stock exchange needs the presence of blue-chips to attract investors. Currently, banking and real estate constitute a big part of the index, which is why the new listings will make for better sectoral diversifications.

In the Middle East, large government companies are considered stable, well managed, and shareholder-friendly. Already, reports suggest that DEWA (Dubai Electricity and Water Authority), valued at $25 billion, will be the biggest ever listing in the emirate for now.

Equally significant is the decision to create a Dh2 billion fund for market-making, which will help boost liquidity on 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 accentuate market volatility and also increase the severity of a market crash.

Eyes on international

On the other hand, good liquidity will attract deep-pocketed international investors as it helps reduce transaction costs and permits easy entry and exit of trades. It's a chicken-and-egg scenario that can only be resolved by bringing in market makers. The Dubai move will boost the profile of DFM in the long term and make it more representative of the local economy.

And finally, it puts to end to rumors of a merger between ADX and DFM. Instead, the new set of initiatives show that the Dubai Government is serious about taking DFM to greater heights.

So that brings us to the next big question; Which companies will be the immediate beneficiaries of the current move. The most obvious one is Dubai Financial Market, and the shares of the exchange have already rallied 39 per cent in recent trading sessions. Volumes on the exchange will get a considerable boost, and revenues are already on the ascendency and forecast to reach Dh270 million in 2021 and up from Dh187 million in 2019.

At the forefront

The listing of large companies like DEWA should be another tailwind. Moreover, DFM, with a Dh11.12 billion market cap, is fundamentally strong, with a net cash reserve of Dh3.2 billion.

Two other companies that will benefit are BH Mubasher and Al Ramz Securities, which offer brokerage services. BH Mubasher was already seeing good growth in 2020 when it posted the highest revenue since its inception. The company's vision is to be a boutique investment firm that offers full-fledged services. It is the first firm on DFM to be granted a short-term margin trading license and is also approved as a securities lending and borrowing (SLB) agent.

Al Ramz also has turned around its financial performance, with revenues growing sharply in the latest quarter. It acquired the market-making business of Shuaa Capital in 2020. With Dubai very much focused on improving trading volumes, the market-making business should thrive. The company also plans to buy back almost 10 per cent of its issued shares, which provides some assurance.

These companies have an exciting ride ahead of them, and investors should keep a watch.