Qatar and the UAE have failed to meet key requirements to be upgraded to emerging market status, potentially denying the lacklustre markets access to multibillion dollar liquidity.

Influential index compiler MSCI will announce its verdict in June and may snub the two countries for a third time, with Qatar failing to raise foreign ownership limits and UAE bourses yet to say when they will switch to a new settlement system.

Low trading volumes and regional unrest are also dampening prospects for Qatar and the UAE to be raised from frontier markets.

Some traders and bourse officials had talked up the UAE's prospects, so another failure could hurt markets as they slowly recover from March's milestone lows.

At its 2010 review, MSCI said both Qatar and UAE must move away from dual account structures, with delivery versus payment (DvP) the global settlement standard.

Qatar will switch to a DvP system from April 11, but UAE domestic bourses -- Abu Dhabi Securities Exchange and Dubai Financial Market  -- have to yet to do so, despite the latter previously saying it would introduce DvP by the end of the first quarter.

An ADX official said it was awaiting approval from the regulator, while the DFM declined to comment.

"It's not yet a concern DvP has yet to be introduced, but it will increasingly be so as we get nearer to the June review - market participants will need time to give their feedback and allow for any potential problems to appear," said Fahd Iqbal, EFG-Hermes strategist.

Foreign ownership restrictions are another worry for MSCI.   

UAE companies limit foreign holdings to about 49 percent, but many strategic firms allow little or no non-UAE involvement.

Etisalat, the Middle East's largest telecoms operator by value, is off limits to foreigners, while Dubai's top bank Emirates NBD caps foreign involvement at 5 percent.
Qatar limits stocks to maximum 25 percent foreign ownership.   

Stocks already on the frontier market index would be best placed to join its emerging market counterpart.    

In the UAE, this includes Emaar Properties and DP World, while Doha's top names include Industries Qatar and Qatar National Bank.

Qatar and the UAE would move on to the radar of dedicated emerging market funds were they upgraded.

The UAE could get a 0.3 percent weighting and Qatar 0.8 percent on the emerging markets index, said EFG's Iqbal, with the latter's larger weighting based on the assumption it will raise foreign ownership limits to 49 percent.

He forecast UAE daily average trading volumes could rise to $118 million from $83 million last year, while Qatar trade would more than double to $126 million.

This may have a multiplier effect as more local and regional money enters in a virtuous circle of increased trading.

An upgrade would draw in international funds, boosting local equity valuations, said Ma'an Al Awlaqi, manager asset management and product development at Dubai Bank.

Other analysts were more wary, warning UAE stocks may be of little interest to emerging market funds, with Dubai's index down about 75 percent below a 2008 peak.

It has failed to participate in a worldwide equity rebound because of a heavy skew towards real estate. Property prices have fallen 60 percent from a 2008 high and further double digit declines are forecast, while Abu Dhabi's bourse has similar troubles.

"Nothing would force an investor to invest but good returns," said Mohammed Yasin, CAPM Investment chief investment officer.

"If we will only represent 0.5 percent of the index, international funds can afford to give the UAE a miss if they didn't believe the returns or the trading volumes are there, and it will not affect the performance of their funds."  - Reuters