Analysis of the Abu Dhabi Stock Markets and Dubai Financial Market
Since the UAE, with a federal system of government, follows an open economic strategy, the UAE financial markets have recently expanded to trade internationally with other financial institutions. The federal system is critical as it divides both political and economic power between the national and local governments. In turn, the system allows for accountability at a decentralized level. According to Saunders and Cornett (2019), the Security and Commodities Authority (SCA) has a superior regulatory role in managing and supervising the UAE stock markets. Additionally, the Authority is tasked with organizing the market’s activities under Federal Law no 4/2000. In the year 2000, the SCA permitted both the Abu Dhabi Stock Markets and Dubai Financial Market (DFM) to begin to operate in the financial sector.
The Abu Dhabi Securities Exchange is authorized to establish branches and centers outside Abu Dhabi by the Emirates of Abu Dhabi, local law number 3/2000. There are over 73 companies listed in the DFM, and this is currently the largest of the financial markets in the UAE in terms of market capitalization. The Abu Dhabi Stock Exchange (ADX) in Abu Dhabi lists a separate set of 60 companies. The records indicate that the DFM has higher trading volumes than the ADX, despite the latter having the ability to operate from any city in the UAE. The difference arises from the fact that the DFM also attracts a significant number of foreign investors. The main advantage of having two stock exchanges is that companies can choose where they are listed. Additionally, the public has options that they can pick from in regards to their investment options.
Difference Between Types of Financial Markets Used in UAE
Importantly, apart from the DFM and the ADX, UAE also has NASDAQ Dubai. A significant difference between the DFM, ADX, and NASDAQ Dubai is the fact that the latter focuses primarily on derivatives for regional and international companies. In contrast, the remaining two also list local institutions. Secondly, the two markets offer different trading hours. Mishkin and Eakins (2018) argue that different market trading hours allow for foreign investors to monitor the markets from whichever part of the world they reside in. Therefore, each of the state financial institutions targets different foreign investors. Therefore, these financial institutions offer different trading hours. Arguably, this benefits the country as one market is always open for investment possibilities. However, for the individual institutions, this can prove challenging as they lose out on other foreign investments based on their working hours.
The regulatory approaches in the two markets are also different, and this allows companies to select the best financial market in line with their industry and their needs. The differences are also used for trading securities as both exchanges allow for the minority ownership of companies by foreign shareholders. Having two exchanges allows sector efficiencies to improve, and they can correct each other within the same economic framework. Both local and foreign ownership is allowed in the two markets with the DFM requiring AED 35 million as minimum capital for listing a local company. On the other hand, AED 20 million is the minimum capital required by ADX for listing any local companies. DFM has a paid-up capital of not less than 35% of equity, while ADX has 50%. DFM also has provisions for a secondary board contrary to ADX. Critically, both exchanges trade securities in the form of equities, bonds, and stocks.
Advantages and Disadvantages of Long-Term Capital Market for Rising Corporate Finance
Long-term capital financing for corporates is used by many companies to raise funding for large-scale projects like business expansion, takeovers, or product development. Bonds can be used as an example of these long-term financing options, which can be listed by both the government and corporates. These are floated in the financial markets for the various companies listed. One advantage of bonds is that they are a significantly flexible way of raising capital. The flexibility of bonds lies in their ability to either be secured or unsecured. This allows companies or governments to prioritize other urgent debts. The second advantage of long-term capital financing is that they have fixed interest rates. This affects corporate finance as it allows for a more natural and streamlined approach to monitoring funds, offering financial protection through proper planning involving both liabilities and assets. It is also important to mention that bonds do not dilute the shareholding of stakeholders, unlike shares.
Despite the advantages, long-term capital market investments have some disadvantages concerning rising corporate finance. One disadvantage is that bondholders have to pay regularly whether the companies are making profits or otherwise. Arguably, investors prefer long-term capital markets as they offer this security – that their payments are not tied to the profit-loss margin recorded by the bond issuer. The disadvantage affects corporate finance if the company is experiencing losses as they will be pushed further into debt to maintain the regular bond payments to investors. A second disadvantage is that the bonds can affect corporate finance by diluting business share value. It is important to note that the payments for bond interests take precedence over dividends. Additionally, it is difficult to change the bond terms after issuing, thereby limiting the flexibility of the company to make financial decisions.
Different Types of Financial Markets Securities
The UAE’s financial markets deal primarily in equities, securities, bonds, futures, mutual funds, commodities, currencies, metals, stones, derivatives, and Sukuk (Islamic bonds). ADX is a market for trading securities, including shares issued by public joint-stock companies. Danielsson (2014) explains that the public joint-stock companies are entities whose share capital is divided into the stock of equal nominal value. In the case of ADX, these companies are public, although there are private joint-stock firms that do the same thing. A second primary type of security offered by ADX is debt instruments issued by governments or corporations, which include both long-term and short-term bonds. The exchange also trades in exchange-traded funds and any other financial instruments approved by the UAE Securities and Commodities Authority (SCA).
The Dubai Financial Market (DFM) operates as a secondary market for the trading of equities and other instruments issued by public shareholding companies and government or semi-government entities, whether based in the UAE or overseas. DFM offers all the mentioned securities that ADX offers. Additionally, it also offers future contracts, which are financial obligations that are paid at an agreed-upon date in the future. The futures market is different from all the other markets as the buyer does not initially have the shares he or she will trade in the future, but borrows the same from the market (Mishkin & Eakins, 2018).
Currently, NASDAQ Dubai’s Derivatives Platform is the only market that offers derivatives security trading. The platform provides a unique opportunity for investors to trade Index Futures on the ADX General Index (ADI Futures, 2020). The ADI tracks the performance of the ADX market and is widely followed by local and regional capital market investors (ADI Futures, 2020). Additionally, the ADI is an all-share index, which means it is made up of all primary listed ADX firms. The ADI Futures provides a convenient way to replicate the overall ADX market through a single instrument (ADI Futures, 2020). This enhances the ability to hedge and implement portfolio management strategies.
One hedging strategy used in future markets for reducing financial risk is the use of leverage. This approach is a crucial attribute allowing investors to invest in the ADI Futures contracts by paying only a fraction of the total value of the contract (ADI Futures, 2020). According to their website, both individual and institutional investors, such as hedge funds, can conveniently replicate their directional trading strategies using ADI Futures (ADI Futures, 2020). Shorting or selling ADI Futures allows traders to invest based on their view on a bull market and still gain profits. ADI Futures facilitate easy hedging by institutional investors such as mutual funds, which hold a portfolio of ADX listed stocks (ADI Futures, 2020). NASDAQ offers different types of derivatives, and an evaluation of the same shows that the equity futures outperform hedging due to the assumed profit margins. Interestingly, NASDAQ offers training to new derivatives traders to allow them to make the best decision based on their investment strategy. The derivatives market is not as large as the other two exchange markets, but there is a significant progression of the same.
Analysis of Etisalat Company
Introduction and Background
The chosen company, according to the instructions of the assignment is Etisalat, a leading telecom firm in UAE. The company is headquartered in Abu Dhabi and was the first registered telecom company in the country. The study aims at understanding the position of the company in the financial markets. The report will include the company’s asset valuation, EPS and PE ratio, debt ratio, and ROA and ROE. A literature review will be presented that will highlight the trends in the market that have affected or will affect Etisalat’s financial positioning and its stock share in the market.
Etisalat’s steady debt ratio has made it an unstable stock in the ADX despite its monopoly advantage.
The report will seek to offer insights on the following research questions:
- Does market stock price affect Etisalat’s ability to effectively manage its debt ratio?
- How does the dividend ratio affect Etisalat’s total net asset?
- What are the impact of Return on Assets (ROA) and Return on Equities (ROE) in determining investment/securities trading related to Etisalat?
Etisalat Company Profile
Etisalat Group is recognized as one of the world’s leading telecom firms. Headquartered in Abu Dhabi, Engineer Saleh Abdullah Al Abdooli serves as the company’s Chief Executive Officer while Mr. Serkan Okandan is the CFO (Etisalat, 2020). The company was founded more than 60 years ago in the UAE as the country’s first telecommunications service provider. Specifically, the organization was established in 1976 and provides innovative solutions and services in over 16 countries in Africa, Asia, and the Middle East. The company serves approximately 148 million subscribers.
Etisalat trades in the ADX with the ticker symbol ETISALAT. The primary business of the company is telecommunication, with 39,508 employees working for the firm. As compared to 31 December 2019, the group’s net assets decreased by AED 1,693 million to AED 56,074 million as of 31 March 2020 (Etisalat Investor Relations, 2020). Consolidated revenue amounted to AED 13,113 million, representing an increase of AED 124 million (1.0 %) compared to the corresponding period in the prior year (Etisalat Investor Relations, 2020). Earnings per share remained the same at AED 0.25 when compared to the corresponding period in the prior year (2019) and AED 0.24 in 2018 (Etisalat Investor Relations, 2020), topping the industrial average. The total debt of the company stood at AED 24 million as of the first quarter of 2020, with associated debts consisting of bank overdrafts, loans, vendor financing, and loans/advances from non-controlling interests. The current market price of the stock is AED 14.57.
Etisalat’s UAE branch is the largest revenue streaming arm of the company. Apart from the standard telco services, the company is also the sole internet provider in the UAE. Danielsson (2014) looks at global financial institutions and explains that the most reliable firms, in terms of financial performance, are those that have a monopoly in the market. Indeed, monopolies result from free-market capitalism (Saunders & Cornett 2019) such that a company becomes hugely influential and buys out all other possible competitors. In finance, the presence of a monopoly gives investors fewer options in regards to stock price and dividend share. Arguably, companies that have competitors also have to consider their debt ratio, stock market price, and similar concepts to attract more investors into their business.
Mishkin and Eakins (2018) explain that Return on Assets and Return on Equities are essential components for any company listed in either the ADX or the DFM as they calculate the profitability and financial performance of a company. Although companies that have a monopoly in the market are not pressured by their competitors, their ROA and ROE are critical in attracting both individual and corporate investors. Arguably, a company’s stock market price is affected by both the ROA and ROE in that investors who believe the company is profitable will drive the demand for the share in the stock market. On the other hand, if both ROA and ROE are not favorable, the stock market price will go down as investors will dump the shares in the exchange. Looking at Etisalat, the stock market price has hit a low of 14.52 and a high of 28 in the last three months. Critically, the current stock price is 14.52, meaning the stock market price has gone down significantly as more people are dumping shares in an attempt to change their assets into cash.
Etisalat share has maintained at levels above AED 10 for the last three years showing excellent stability versus the overall market index of ADX. The share price deeps in early 2020 before recovering. This shows some correlation with the index indicating an overall drop in market activity during the same period.
The debt ratio of a company is also known as the debt to asset ratio or the total debt to total assets ratio. Hence, the formula for the debt ratio is total liabilities divided by total assets. The debt ratio indicates the percentage of the total asset amounts (as reported on the balance sheet) that are owed to creditors. Over the last three years, the debt ratio of Etisalat has been on a steady rise and remains over 50%. Additionally, the company has a reasonably high ROE over the past three years of 17-20% compared to the industrial average of 6% with a ROA of 6-7%. The graph below gives a summary of the same:
The findings realized answer the research questions that were set at the beginning. First, both the literature review and the discussion presented prove that the market stock price affects Etisalat’s ability to manage its debt ratio effectively. As presented earlier, the company’s debt to asset ratio has been steadily increasing, indicating weak financial structures within the company. This is a disadvantage to its investors, although the company boasts of a monopoly in internet provision. Arguably, it is this realization that has led to the fall of the stock price to the new low of AED 14.52.
Further, the company’s dividends have been greatly affected as the increase in the debt ratio also means a decrease in total net assets. Even though a significant percentage of investors are attracted to dividends increasing the dividends would negatively affect the company’s total net assets unless the debt ratio is reduced. Arguably, the ROA and ROE have also been affected by the substantial debt to asset ratio; thus, it also affected investor trading leading to the lower market share price.
Arguably, both the ADX and DFM have strong fundamentals as bourses in the UAE. Abu Dhabi Government runs and maintains the ADX, while 80 percent of the DFM is handled by Borse Dubai, which also serves as NASDAQ Dubai’s holding company. Considerations of a merger as floated around should be deliberated upon to come up with a more robust financial market for UAE both for local and foreign investors. Etisalat, as a company, is one of the best examples of companies that can benefit if the merger of the two financial markets, as shown in its books and company profile. Etisalat has a strong financial position as shown by the major indicators, PE, ROE, and ROA vis-à-vis the competitors of which some are listed in the DFM while Etisalat is listed in the ADX.
Conclusion and Recommendation
In conclusion, the UAE financial markets are among the best in the world, with both local and foreign investors. The two leading exchanges, the Abu Dhabi Stock Market and the Dubai Financial Market offer various types of securities such as futures, bonds, stocks, and equities. The analysis of the financial markets in the UAE reveals that there is a keen and rising interest in the derivatives market. One recommendation that can be made after the analysis is that the two exchanges should be merged. This is due to the duplication of services offered and will also cushion both companies listed and investors. One financial market will allow for better regulation of the same, in turn, also enhancing the country’s financial sector as a whole.
- ADI Futures, 2020.
- Etisalat, 2020. Web.
- Etisalat Investor Relations. 2020.
- Danielsson, J 2014, Global financial systems: stability and risk, 1st edn, Pearson, New York, NY.
- Mishkin, F & Eakins, S 2018, Financial markets and institutions, global edition, 9th edn, Pearson, New York, NY.
- Saunders, A & Cornett, M 2019, Financial markets and institutions, 7th edn, McGraw-Hill, New York, NY.