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Performance and Challenges for Abu Dhabi Financial Market
In the contemporary world today, an importance of financial markets has become more essential to all people than it has been ever before. Securities markets are a major financial arena in most nations today, where all sort of funds and stocks are traded. The performance of these markets is determined by how well they have been established as well as their attractiveness to investors (Al-Ajmi & Kim, 2012). However, they also face some challenges, which tend to limit their expansion and trading capacity.
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This paper aims at analyzing the Abu Dhabi Securities Exchange (ADX) by determining its establishment and objective, the last ten years of its performance, its major crunches, the challenges as well as risks it is facing. It will also present practical recommendations on how this market can solve its predicaments.
Establishment and Objective
The ADX is a governmental and non-profit financial market located in the city of Abu Dhabi in the United Arab Emirates. It was established on 15 November 2000 via the local law number 3. According to this regulation, the market was authorized as a legal institution of self-governing status with independent finance and management (ADX, n. d.). The law has also established the supervisory regulations necessary for the ADX and presented its executive powers for exercising its functions. The Abu Dhabi Securities Exchange is as well legally allowed to start other security trading center outside the Emirate of Abu Dhabi. In 2016, it opened its new branches in such cities as Sharjah, Al Ain, Ras Al Khaimah, Fujairah, and Zayed.
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Regarding management, this market has seven Board of Directors being selected through the Amiri Decree. Each member is allowed the one term services of three years. The ADX regulation is administered by the Emirates Securities and Commodities Exchange (ESCA), a body that serves as a national regulator of all securities traded in the UAE (ADX, n. d.). This authority gives licenses and supervises all stocks and funds. It and can also revoke or suspend their listing in this market. Lastly, the ADX comprises of several brokers. Therefore, the ESCA sets a legal framework for their operations.
The ADX has six functions, which serve as the objectives of its establishment and continuous operations. First, this market is obliged to giving opportunities to people, where they can invest their savings and funds in securities for their personal welfare and the benefit of the UAE economy (ADX, n. d.). The ADX also has an objective of guaranteeing that there are sound and correct securities transactions in the arena. They should as well ensure that demand and supply combine in a proper manner giving rise to well profound prices. The third aim of this market is providing protection to all its investors. It should be setting fair and decent dealing principles, according to which the investors trade with each other.
The ADX also has a goal to guarantee that it has imposed robust controls in all the securities traded on the market. These checks are meant to provide sound and proper procedures conducted for trading operations. The fifth aim of the ADX is to create an exceptional investment consciousness. It means that profound studies are performed in the market with a primary aim to ensure that all the investors put their savings in productive sectors (ADX, n. d.). Lastly, the ADX has an objective of providing financial and economic stability as well as creates proper trading methods with the purpose to guarantee sufficient securities liquidity and prices stability on the market.
Year by Year Performance for the Last 10 Years
Overall Index Movement
The overall index is one of the tools used in the securities market to determine the performance based on its movement. This indicator is computed by use of the weighted average number of stocks selected from all sectors. That why it is referred to the overall index (Abdmoulah, 2010). The movement thus can accurately predict whether the securities exchange market is facing some challenges or not.
Concerning the ADX overall index change, the following fact can be observed. This market has been having both ups and downs on its trading. For the last ten years, it has been volatile in its index with no well-defined consistency. For example, between the years 2006 and 2007, it had experienced the fall by over 1600 points as it reduced from 4500 points in 2006 to 2900 points in 2007 (Trade Economics, 2016). By 2008 it had recovered from that fall and rose to 5045 points, reaching one of the most remarkable market performance tops in the previous decade. However, this excelling success of the ADX was short because, by the year 2008, the index had again dropped to around 2250 points. The market had lost nearly half of its index points within that year.
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Since then, the ADX started recovering in 2013. However, from 2015, another downward trend commenced. At the moment, this index stands at 4180 points, but it is the reduction of over 1000 points from the onset of the year 2014 (Trade Economics, 2016). The data above thus show that the market has not been performing well. There is a need of finding an amicable solution to the current predicament. The Figure 1 below displays an explicit representation of the overall index movement.
Figure 1: Overall index movement at the ADX for the last ten year (Trade Economics, 2016).
New listings also help determine whether the market performance is good or poor as they symbolize an attractive market. When the arena has more listings, it is the indication that the regulations are good. The level of trading is quite high. Therefore, the market has limited risks (Abdmoulah, 2010). However, the securities exchange market with low listings or no new listings depicts the unattractiveness and high risks that companies cannot afford to put their share under risk in such trading environment.
The ADX was established in 2000; and, by 2003, it had already listed 30 companies. Its significant boost in new listings occurred between the years 2004 and 2005 when it introduced 29 new enterprises in the market making the total number of businesses increase to 59 (Al-Ajmi & Kim, 2012). In 2006, there was a decrease as only one organization was added to the trading list. However, this slowdown did not last for a long time. The reason is that between 2007 and 2009 these market had been able to put seven more companies into its trading. This period had been thus a good performance phase as the ADX was attracting new businesses with much ease.
Nevertheless, the good productivity time did not last for a long time. Since 2009, this market has only managed to add only three organizations in its trading list bringing in total to 70 companies by 2016. The listing was even much poor in 2013 and 2014. Not even a single company had been listed during those two years (Omet, 2016). The above data are thus the indication that the market has not been doing very well since 2009. The Figure 2 below shows how the ADX has been expanding its total listings since 2005.
Figure 2: Changes of total number of listings at the ADX from 2006 to 2016 (Omet, 2016).
Market capitalization is a tool used to measure the performance of the securities exchange market by adding all the values of outstanding share being traded while using the market price. When the value is high, then it is considered that the market is performing in an attractive way. The reason is that investors get returns on their invested money (Abdmoulah, 2010). However, when the market capitalization is small, then it is the reflection that it is less attractive. It means that shares are not increasing their market prices.
The ADX market value was quite healthy in 2007. The capital was at Dh444.55 billion at the end of that year. However, this high market capital was followed by the great depression in 2008. It lowered the ADX value to Dh252.5 billion (Al-Ajmi & Kim, 2012). Due to this dramatic drop, the shares listed in the market lost their value by approximately 43% just within the period of two years only.
From 2008, this value did not recover for four years. It is from the year 2012 the boom in the market has been witnessed. By 2014, the ADX had fully recovered to the capital market of Dh467 billion (Omet, 2016). However, since then, the market has reduced in its value at a slow rate. Therefore, by September 2016, its capitalization was just Dh441 billion. It means it was lower than in 2014 by 5.0%. The market thus despite recovering from the period of the crisis from 2008 to 2012 is still not so stable. The Figure 3 below displays the change in the market capital in the ADX during last ten years.
Figure 3: ADX market capitalization from 2006 to 2016 (Omet, 2016).
Number of Initial Public Offers
Initial public offers that the privately held companies have seen some wellness in the securities market. Therefore, they give up some of their share to the mentioned market. The only way is when the stock exchange in question is competent enough to prove to a private owner that the company will be better as a public organization (Abdmoulah, 2010). The IPOs also indicate the trust that investors have in their market. All its investors buy the new shares.
The ADX has had only six IPOs for the last ten years of its operations. Most of these IPOs had arrived between the year 2006 and 2009 when seven initial public offers were introduced to the market. However, since then, only three IPOs have been issued by the ADX. It was the indication that the market had been not performing well (Omet, 2016). Despite that several companies have promised to introduce their share in the initial public offer since 2014, one or two ones have managed to succeed. Therefore, it can be argued they are going away from the market because it is not performing as they would like it to. The Figure 4 below shows the number of initial public offers in the ADX since 2006.
Figure 4: Number of initial public offers at the ADX from 2006 to 2016 (Omet, 2016).
Major Crunches since Its Establishment
One major crisis that affected the ADX market had occurred between the years 2008-2009 when it plummeted by over 2000 points in the general index. Since its introduction in 2000, the market of Abu Dhabi had witnessed an upward rise in its level with several companies listing their stocks (Oxford Business Group, 2014). The trading was also high as most investors in the world perceived it as a potential emerging market. Therefore, they were quite opportunistic about its prospect. In the regional competition, this arena despite being new has expanded rapidly. It was ranked in the fifth position of all the securities markets in the Middle East and North African Regions (MANE).
According to Oxford Business Group (2014), this market preformation in 2007 antecedent to the crunch was excellent. It marked the epic of the ADX performance since its appearance in 2000. During the second half of this year, the ADX annual returns increased to 148.4%. It reached Dh175 billion ($47.7 billion). The daily turnover of the market during the same period also had a magnificent change with a transfer from $68.1 million to $189.2 million (Oxford Business Group, 2014). This daily shift was quite attractive to both investors and companies as it arrived to an increase of 177.8% in the earnings from the market. With these data, it was a disappointment to witness any negative change from such progress.
The situation itself occurred in the first quarter of 2008 when the market capitalization of the ADX dropped by 42.98%. The general index in the same period also fell from 50450 to 2295 points in the end of 2008 (Oxford Business Group, 2014). This time recorded the lowest trading capacity of the ADX since its formation. The liquidity of the share deteriorated; and trading almost stopped. With such climate in the market, new companies did not list their shares for trading. There was thus a new initial public offer.
Reasons for the Crunch
The depression of 2008-2009 occurred in the ADX market as a result of the global financial crisis during the period. It started in the United States and quickly spread to the European nations as the markets in these two regions were well connected. The crisis thus affected two major financial centers in the world simultaneously. Therefore, the crisis was quickly transferred to other arenas across the globe (Moustafa, 2014). With an open market to foreign investors and universal influence, the ADX was not buffered from a liquidity problem that the United States and Europe were facing during that time.
The ADX was still a young arena at that point. Therefore, it was not immune to such significant changes like a global crisis. External investors from the American and European regions also saturated the market. They switched their money from the ADX on the onset of the crisis. Most of them transferred their funds to markets that they considered more resistance to launching the global financial crisis. Therefore, the ADX was less attractive (Moustafa, 2014). Moreover, local people were also facing the problems with the decline in economic activities and increase in an unemployment level. They also could not participate in the ADX trading.
The 2014-2015 Crunch
The second crisis that the ADX experienced had occurred between the years 2014 and 2016. However, this crash had not been as intense as that of 2008. It did not diminish the operations of that market entirely. However, it lowered its recovery rate from the crisis of 2008 (Paltrinieri, 2015). By mid-2014, the ADX market had reached its highest best general index to 5200 points. It was a result of sound financial recovery and the booming oil prices which provided an enormous elevation in the liquidity of securities in the market of Abu Dhabi.
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However, by the end of the year 2014, the market had undergone the reduction in its general index by almost 700 points. The general rate reduced to 4500 points in the end of the year (Paltrinieri, 2015). The same trend mirrored for 2015 to reach the level of 4000 points. Despite that, it was not the complete crash of the ADX. It was supposed to be a crunch as it had limited its continuous expansion. The ADX has already been ranked as an emerging market in the world.
Reason for the Crunch
Based on the current trades on the global market, the latest crash of the one in Abu Dhabi can be attributed to low oil prices today. The United Arab Emirates dispute having initiatives to diversify its economy is still dependent on the oil money to fund and maintain its economy (Paltrinieri, 2015). With the dramatic reduction in the oil cost in 2014, the country liquidity reduced as the oil sales diminished in their value. That effect was thus translated to the securities market. Therefore, it can be used to explain why the ADX market is still having some stagnation, though it is expected to be on a rise.
Challenges and Risks Faced by Investors
One of the greatest problems for investors in the ADX today is a lack of economic advisors in the region. They could direct them on how to trade in the market. The securities exchange arena is new in the United Arab Emirates. Therefore, only few people are well informed about domestic market (Al-Tamimi, 2015). A foreigner, on the other hand, also lacks the adequate data about the companies acting in the UAE. As a result, there is the information asymmetry. The gap in economic advisors is a huge challenge, which has restrained both local and international investors from participating in the ADX market trading.
The market also faces another threat of the lack of public awareness locally. Most of people in the United Emirates were not used to the securities market as it had not existed in the country in the past. As a new concept to this society, local investors are still jittery concerning the whole idea of investing in the virtual market (Al-Tamimi, 2015). The lack of awareness concerning the importance of securities market thus is limiting them from participating in the ADX trading. If investors had the necessary knowledge about the arena, then they would be involved more, thus giving the local sustainability on the market.
Investors also encounter a risk of high transaction cost as opposed to other inputs. Most individuals in the UAE as stated earlier have the limited information about the purchase of securities. Therefore, they are more likely to be changed more by the brokers in the arena (Al-Tamimi, 2015). Levies and taxes imposed on the trading in this market also add some extra cost to investors making them incur more or even shy away from the arena. The international traders bear even a much high cost on stamp duties and exchange rates adding to their spending.
The investors as well face a risk of liquidity of securities in this market. It means the time within which these securities exchanges occur among investors. As an emerging market, the ADX has a relatively low liquidity rate compared to other local securities markets. Therefore, it is a massive uncertainty for investors (Al-Tamimi, 2015). Most traders do not want to be kept on hold when they want to sell or purchase securities. Such space causes some loss of the real value of money. The risk of low liquidity is thus a huge inhibitor which even forces investors to turn away from the ADX.
Recommendations for the Growth of tAbu Dhabi Financial Market
The first recommendation that should enhance the growth of the ADX addresses the issue of securities liquidity. One of major hindrances to the expansion of most markets in the world is a huge gap between the supply and demand times in the stock exchange. However, for those arenas bridging this vacancy in the past like the New York Securities Exchange or London Securities Exchange, the growth is observed immediately. To enhance the high liquidity rate in this arena, the ADX management should reduce the minimum tick level (Abdmoulah, 2010). By reducing it, they will encourage more purchases of shares even by low scale investors thus raising the velocity of trading in the market.
It has also been stated that more firms are not listed in this securities market because of existing stringent laws. The legal framework of listing stocks in the ADX stipulates that the company must surrender minimum at 55% of its total shareholders. However, most organizations are not ready for such huge sales of shares. Families hold most enterprises in the country. Therefore, they feel that they will lose the business administration if they sell 55% of their company. The government of the UAE should thus adjust the legal framework to the minimum required shares below 50% (Abdallah, 2013). Such move will motivate the privately held organizations to list their shares on the arena. Therefore, it increases the total capitalization as well as attractiveness of the market.
The transaction cost should also be addressed by the government to attract more foreign and local traders. The current brokerage structure in control is less reliable as compared to more developed securities market. Therefore, the change is needed. By setting more strict rules onto brokers activities, the government will reduce the trading cost enhancing more trading at the ADX (Abdallah, 2013). Levies, taxes, and stamp duties should be fairly changed in order to encourage more traders in the market.
The last recommendation for the increase in this arena goes to disseminating and acquiring of data. One challenge that has been listed as a hindrance to more traders venturing into the ADX market is the lack of information and economic advisors. The ADX thus has to create the adequate awareness to local people on the concept of the securities market to encourage them to invest in this area (Abdallah, 2013). The market with the help of the local government should also ensure that there is the sufficient information about the listed companies. Moreover, the ADX should guarantee that economic advisors are also available; and the market offers its services at low prices.
In conclusion, the above paper has analyzed the Abu Dhabi Securities Exchange by determining its founding and objective, its last ten years of performance, significant difficulties, challenges, and risks that its investors are facing. It has also outlined some reasonable and practical suggestions on how this market can solve its current quandaries. The performance analysis has revealed that the ADX has not performed well in the last ten years due to the financial crisis of 2008 and the current fluctuation of oil prices. It has been recommended that the laws on the companies listings, the liquidity of securities, transaction cost, and the increase in the information should be changed to enhance the growth in this financial arena.
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