"International and local investors regard proper disclosure, transparency and consistent corporate communication as a key differentiator when selecting investment opportunities. Adopting best practice investor and financial communications programs can have a real impact on both the valuation and attractiveness of a company’s equity and debt."
2014: A year of change
2014 may prove to be a turning point in the development of our regional capital markets. The long awaited addition of the UAE and Qatar to the MSCI Emerging Markets Index will attract greater interest from global institutional investors looking to add the shares of leading regional companies to their portfolios. These MSCI upgrades are clear evidence of the overall improving standards taking place within our regional markets.
More recently, Saudi Arabia’s Capital Market Authority announced its plans to further open up the Kingdom’s capital markets to foreign investors, allowing them to trade shares directly on the Saudi exchange. Given that the Tadawul is expected to account for roughly 4% of the MSCI Emerging Markets Index (on par with Russia), this is a potential game changer for the entire region.
As regional investor sentiment, underpinned by improving economic fundamentals, turns more bullish, equity and debt capital markets activity is also ramping up as companies look to lock in attractive valuations and competitive pricing for IPOs and debt issuances.
Keeping pace with market changes
As our markets move to become further integrated into the global capital markets, there will likely be a profound impact on their development as well as the composition of investors looking to invest in them. It is clear that as access to regional capital markets improves, more and more global institutional investors are likely to allocate capital to the region. These developments are widely regarded as positive, as they will help countries in the region further diversify their economies away from the petrochemical sector, and will likely lead to deeper and more liquid and efficient financial markets.
Wider access and improved regulatory frameworks are only one side of the coin however. Such top down developments must also be met with substantive changes in the way regional companies communicate and interact with investors and the wider financial community. Having the letter of the law in place is one thing but the spirit of the law also needs to be more proactively adopted by companies themselves.
International and local investors regard proper disclosure, transparency and consistent corporate communication as a key differentiator when selecting investment opportunities. Adopting best practice investor and financial communications programs can have a real impact on both the valuation and attractiveness of a company’s equity and debt.
As our markets develop, regional firms that do not meet these higher expectations will possibly be ignored, or at least, looked on warily by investors. And when times get tough, as they always do, those companies that consistently fail to communicate a clear and compelling story (or indeed fail to communicate at all) are normally the ones to suffer disproportionally.
In our view, it is no coincidence that the UAE’s Securities and Commodities Authority (SCA) decided in March this year to make it compulsory for all listed companies to establish an investor relations department. The regulator’s role is to anticipate and act on expected future changes to the investor and markets landscape and the new directive is an example of that. We believe the decision to enforce higher standards and practice is warranted and a step in the right direction.
The SCA directive could not come any sooner. Finsbury’s analysis of investor relations and communications practices shows that there is much room for improvement, especially in the case of mid-cap companies. Many companies don’t have a dedicated investor relations subsection on their websites, not to mention dedicated personnel who would deal with investor queries. Consistent and proactive adherence to market standard investor disclosure practices (or even just basic, regular communication with their stakeholders) is also lacking. A similar study was conducted by the Qatar Exchange in 2012. According to the survey, a vast majority of listed companies did not have a dedicated investor relations department. Further studies are needed to evaluate the adherence and progress of such initiatives across the region in order to ensure that this new momentum is maintained and that set standards are adhered to.
The benefits that await
The value of building and clearly communicating a robust and attractive investment case (and not just publicly listed companies, but also companies looking to raise capital from debt markets) cannot be understated. Proactive investor relations, alongside consistent and broader financial communications practices, are crucial. Proactive engagement with key financial stakeholders, including investors, sell-side and buy-side analysts, financial institutions and, equally important, the local and international financial media, supports informed investor decision making and ultimately more efficient markets.
A clear understanding of a company’s business model, its growth strategy and the ability of its management to deliver sustained value can help create a committed, supportive and diverse shareholder base. In the long term, a continued, proactive communications engagement, coupled with appropriate levels of disclosure, can also help enhance the market value of a company, provided of course that the company delivers solid results. Furthermore, the need to integrate digital channels as part of a company’s overall communications mix – from a company’s website to the use of social media such as Twitter and Linked-In – is fast becoming a further necessity.
There are thus tangible benefits in adopting a proactive, consistent and transparent approach to communicating. To ignore this can not only hold back a company’s value creation potential but likely destroy value over the longer term. Indeed, the recently well-documented (and highly public) chain of events at a high profile DFM-listed construction company, serves as a good example of how inadequate communication with the markets (and other key stakeholders such as the media) can not only result in a company’s value depreciation, but also have an adverse effect on the wider market as overall investor confidence turn bearish and drags the whole market with it.
With the recent positive changes to the regional market landscape and the likelihood of further regulatory pressure for better corporate disclosure, transparency and communication, now is the time to bring regional investor and financial communications practices up to international standards. Continued progress in regulatory and market infrastructure is a key factor for such progress, however the buck does not stop there. Ultimately, the responsibility for sustainable, long term market development must lie with the key market participants themselves – notably those corporates looking to tap the markets for their capital requirements. If regional corporates want to see better market access, efficiency and liquidity in their capital markets, then they must become the change they seek.
 SCA board decides to compel listed companies to set up Investor Relations Department (Securities and Commodities Authority, 9 March 2014)
 Analysis of the websites of top 90 companies listed on the Dubai Financial Market and Abu Dhabi Securities Exchange with market capitalization of at least AED100m (Finsbury, August 2014)
 Qatar Exchange Conducts Survey To Evaluate Listed Companies’ Investor Relations Efforts (Qatar Exchange, 26 September 2012)