Gulf bourses chase global alliances and shun M&A

The much-needed consolidation of Gulf stock exchanges is expected to be delayed, with regional bourses focusing instead on alliances with global players and diversification from cash equities.

Bahrain will launch the ninth stock exchange in the region next year and with volumes low and fees high, the case for consolidation is strong. But there is little enthusiasm among officials for a pan-Gulf exchange, despite the fragmentation of liquidity being a deterrent for foreign investors, and Dubai is likely to remain pre-eminent.

"A lot of this is political, if the exchanges were purely profit-driven then consolidation would happen a lot sooner," said Robert McKinnon, Managing Director of Al Mal Capital.

The UAE apart, regional bourses have little domestic competition to worry about, with rival exchanges unlikely to receive regulatory approval to trade, as has happened in developed markets. This protectionism enables Gulf bourses to charge fees many times higher than their global counterparts.

The global economy has slowed the development of the regional stock markets. Gulf bourses are increasingly eager to link up with international players and move away from cash equities.

In June, the Qatar Exchange agreed to sell a 20 per cent stake to Nyse Euronext and said it would launch a derivatives platform, exchange-traded funds and bonds. Analysts said the deal showed the accent was on rivalry and not consolidation, though competition could eventually lead to more pressure to merge.

"It shows the race is on for who wants to become the regional hub," said Haissam Arabi, Chief Executive Officer of Gulfmena Alternative Investments. "This is in everybody's best interests, with more competition pushing innovation, the creation of new instruments and better pricing."

McKinnon said if markets opened up to competition, fees would have to come down eventually and if this happened there would be a need to consolidate.

The alliances are driven by the needs of both the global players and the Gulf bourses.

The Abu Dhabi Securities Exchange and Kuwait Stock Exchange have agreements with Nyse and Nasdaq OMX, respectively, and plan to launch derivatives markets.

There are signs that international players could have a role in pushing much-needed consolidation.

Analysts anticipate a merger of Borse Dubai's two exchanges after the proposed consolidation of back office operations which will bring Dubai Financial Market and Nasdaq Dubai on to a single trading system.

"There are areas where we're working very closely together where we could both benefit," Essa Kazim, Borse Dubai Chairman and Executive Chairman of DFM, said in June.

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