Time to end the lip service paid to investor communications in the Middle East

As the Middle East continues to open its financial borders, more investors, more trade, and more positive developments are in store for the region. But the Middle East will fail to reap the full benefits of these changes unless local companies improve the way they communicate with the financial community.

As the Middle East continues to open its financial borders, more investors, more trade, and more positive developments are in store for the region. But the Middle East will fail to reap the full benefits of these changes unless local companies improve the way they communicate with the financial community.

The Middle East does not have a strong tradition of open and transparent corporate communications, which is vital for good regional financial health. And the need couldn’t be greater. The recent addition of the UAE and Qatar to the MSCI Emerging Markets Index will attract greater interest from global institutional investors – clear evidence of the overall improving standards taking place within the Middle Eastern regional markets.

Underlining this point, Saudi Arabia’s Capital Market Authority announced its plans to further open up the Kingdom’s capital markets to foreign investors. This will allow foreign investors to trade shares directly on the Tadawul, the Saudi exchange. The Tadawul is expected to account for roughly 4% of the MSCI Emerging Markets Index, which is on par with Russia. Such an event is a potential game changer for the entire region.

In tandem with this, regional investors are becoming more bullish as fundamental economic indicators are all pointing towards improved financial health. This, in turn, is ramping up the activity in the equity and debt capital markets as companies look to lock in attractive valuations and competitive pricing for both IPOs and debt issuances.

Keeping pace with market changes

It is clear that as access to the capital markets improves, more and more global institutional investors are likely to allocate capital to the region. This will help countries in the region further diversify their economies away from the petrochemical sector, and will potentially lead to deeper, more liquid, and efficient financial markets.

Greater 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.

International investors regard proper disclosure, transparency and consistent corporate communications as a key differentiator when selecting investment opportunities. It is in the best interest of regional companies to adopt best practices when it comes to investor and financial communications. This is a necessity in order to have a real impact on both the valuation and attractiveness of their company’s equity and debt.

As markets develop, regional firms that do not meet these expectations will likely be ignored or viewed with distrust by investors. And when times get tough – as they always do – those companies that consistently fail to communicate a clear and compelling story 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 2014 to make it compulsory for all listed companies to establish an investor relations department[1]. The regulator’s role is to anticipate and act on expected future changes to the markets and investors; the new directive is an example of that. We believe the decision to enforce higher standards and practices is a step in the right direction.

The SCA directive could not come any sooner. Finsbury’s analysis[2] of investor relations and communications practices shows that there is much room for improvement, especially for mid-cap companies.

For example, many companies do not have a dedicated investor relations subsection on their websites nor dedicated personnel to deal with investor queries. There is also a gaping lack of consistent and proactive adherence to market standard investor disclosure practices.

Understanding the significance of financial communications, the Qatari stock exchange evaluated the state of investor relations of listed firms[3]. According to the survey, a vast majority of listed companies did not have a dedicated investor relations department.

The benefits that await

The value of building and clearly communicating a robust and attractive investment cannot be understated and proactive investor relations are crucial to achieving this end.

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 will 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.

There are tangible benefits in adopting a hands-on, consistent and transparent approach to communicating. To ignore this will not only hold back a company’s value creation potential, but likely destroy value over the longer term.

With the recent positive changes to the regional market landscape and the likelihood of further regulatory pressure for better corporate disclosure, transparency, and communications, 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.

Nicholas McDonagh is a Partner and heads up the Finsbury Middle East operations.

This article was first published by the Middle East Public Relations Association.

[1] SCA board decides to compel listed companies to set up Investor Relations Department (Securities and Commodities Authority, 9 March 2014)
[2] 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)
[3] Qatar Exchange Conducts Survey To Evaluate Listed Companies’ Investor Relations Efforts (Qatar Exchange, 26 September 2012)