ADX aims to be traded, not just held

Capital Letter is Frank Kane’s weekly series on Abu Dhabi’s money, power and ambition

For 25 years, the Abu Dhabi Securities Exchange has done one job supremely well: being the marketplace where you buy a chunk of Abu Dhabi Inc.

The thinking went like this: if you get Adnoc’s satellites, the sovereign-linked giants and the big banks in your portfolio via ADX, you own a slice of the UAE’s balance sheet.

That, as explained to me this week in conversation with ADX officials, is no longer the sole mission of the second-largest stock exchange in the region by market capitalisation.

The buzzword now is transformation, from a national cash-equities exchange into what the industry calls an FMI – a financial market infrastructure group. Less a shop window for Abu Dhabi Inc, more an integral pillar of its economic and financial ecosystem.

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The distinction matters a lot. A cash-equities exchange sells you shares. An FMI sells connectivity – to other exchanges, other asset classes and other pools of capital, at home and abroad.

ADX is already part of an exchange network via the Tabadul alliance, which includes Gulf and central Asian countries, as well as having GCC exchange relationships. All are aimed at building out the post-trade infrastructure essential for sophisticated global investors.

This does not mean the traditional pitch has gone away. If anything, ADX wants it sharpened. Yields across ADX average around 5 percent, against roughly 2.5 percent for global peers. That gap highlights the appeal of ADX as both a “gateway to Abu Dhabi” and a sovereign-related income stream.

Add resilience through a year that has tested every Gulf market’s nerve and the ADX pitch becomes: growth, yield and the UAE’s balance-sheet strength, all in one ticker.

Liquidity is the watchword

The more interesting story, though, is what ADX wants to become underneath that pitch. The word that came up most in conversations was not growth, it was liquidity. That means adding depth, breadth and resilience to the market offering.

Breadth means diversification of products and ADX has been adding fixed income, securities lending and borrowing, exchange-traded funds and derivatives, plus a push to list more companies from outside the UAE alongside the domestic pipeline.

Depth is about participants. Retail brokers, global clearing members and market makers are all being courted to diversify the order book.

Resilience, of course, is what the exchange says it already demonstrated this year.

In this new perspective on global exchanges, liquidity, rather than market capitalisation, is the most important metric. A large portfolio that does not trade provides market bulk, but is relatively peripheral to market activity.

That is the crux of the issue for ADX. By market cap, ADX is a genuine heavyweight – inside the world’s top 20, a scale that looks disproportionate next to the size of the underlying economy.

But a large share of that headline number sits with a small number of very large, prestigious names.

Group the six listed Adnoc companies, add International Holding Company and First Abu Dhabi Bank, and you are looking at around half of the exchange’s market capitalisation.

Which is precisely why the diversification push is so significant.

If market capitalisation is the vanity metric and liquidity the valid one, then ADX’s future is not about adding another giant to the board. It is about persuading a wider range of investors – retail versus institutional, foreign versus local – actually to trade what is already listed.

Different investors sell and buy for different reasons and that mismatch of motives is what creates a market, rather than a static shareholder registry.

Tellingly, ADX has no retail participation target. Too much sits outside the exchange’s control to make a hard number meaningful. This reflects the reality that the free-float issue cannot be simply strategised away.

The ADX transformation strategy aims to put it “on the global map” five years from now, not as a market-cap milestone but as a capital venue – accessible, tradeable and investible.

ADX is confident it already has infrastructure and connectivity beyond emerging market standards, built on Nasdaq technology. It is participation and liquidity that need to catch up.

Competition in the region comes from Saudi Arabia’s Tadawul, which benefits from the huge market capitalisation of Saudi Aramco; and the Dubai Financial Market, which has a livelier retail trading system. 

The big prize for ADX is to route an increasing share of the wealth Abu Dhabi generates back into Abu Dhabi’s own capital market via an energetic and vibrant marketplace, with global appeal.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist