From a standing start on 1 September, the Gulf’s first true futures market seems to have hit the ground running. Trading on Nasdaq Dubai’s equity futures market increased rapidly in November as new investors entered the market. The 222,829 contracts traded during the month represented a more than doubling on the previous month, rising 116%.
Bourse chiefs will be cheered at this response. The rapid increase in trading on the Nasdaq Dubai since it opened its doors underlines both the novelty of these instruments, as well as investment managers’ pressing need for broader palate of investment tools for both investment and wealth protection purposes.
“We need to have the tools to hedge, to be able to short-sell. If there’s a drop in the market, I need to be able to use options and futures – the tools that institutional investors need to invest,” says Ryan Lemand, managing director and head of asset management and wealth management at ADS Securities.
The Dubai equity futures market offers single stock futures contracts on nine leading UAE-listed companies: Abu Dhabi Commercial Bank, Aldar Properties, Arabtec Holding, DP World, Dubai Islamic Bank, DXB Entertainments, Emaar Properties, Etisalat and Union Properties. The market offers regional and international investors opportunities for hedging, leverage, and the ability to make gains when share prices are falling as well as rising.
Regional asset managers believe it marks a breakthrough for the wider region. Derivatives have been slow to take off partly because of cultural norms that view such products with suspicion.
“Nasdaq Dubai has introduced these tools which is a great step forward, and hopefully this will expand across the UAE and GCC. That should attract more institutional investors,” says Lemand.
The Dubai-based exchange plans to expand its range of futures in a phased programme, including contracts on companies listed on other MENA exchanges as well as index futures and equity options. It will also increase the range of connected brokers and other market participants. Currently, seven brokers are represented but this should increase as deeper understanding of futures permeates through the market.
The single stock future provides for an instrument to more accurately hedge exposures for asset managers and corporates. These will appreciate the ability to hedge existing equity position in the most attractive stocks such as Dubai real estate developer Emaar. This means they can insure against a price fall and will also have the ability to make money if they want to take a view on whether the market is up or down. Investors can gain from futures when the underlying share price falls, as well as when it rises. The futures are offered with 1-month, 2-month, and 3-month expiry dates in the currency of the underlying share listing.
The other major advantage is leverage. The impetus to pay the full cost of shares in Emaar, when the cost of buying Emaar futures is lower – and obtain all the upside – is a compelling prospect for many.
As Nasdaq Dubai CEO Hamed Ali pointed out: “Leverage on futures gives investors the possibility to make larger gains than if they had traded the underlying shares, and they can also use futures to protect their existing wealth.”
Having whetted appetites, Nasdaq Dubai is now working to expand the range of derivatives through selected products with investor appeal. These could be futures on other GCC and MENA stocks, listed on other exchanges. The plan is to have trading options on indices too.
The broader strategic ambition is to spur others in the UAE to offer derivatives, and build critical mass for the asset class. So far it is slow going. Over the summer, Abu Dhabi-based asset manager, Akfar Capital, launched an ETF, but one that is physical, in-kind, rather than derivate-based. More work will be needed before ETFs bed into the Gulf’s investment culture.
Nasdaq Dubai believes its first mover advantage will be significant, as will its links to the wider international investor community, something other local exchanges cannot offer. While the UAE’s equity futures market is for now the preserve of local and regional investors, the likelihood is that larger asset managers will soon be looking more closely at Dubai’s offering.