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UAE market headed for longer bear spell

A combination of factors such as the overall negative sentiment, lacklustre corporate performance in the second quarter, lack of liquidity in the market, the war in Lebanon and a perceived threat of uncertainties in Iran are expected to curtail the market activities for the rest of the year.

The Dubai index which peaked above 1,200 in mid-October last year has fallen 67 per cent since. From the beginning of this year, the index has slipped more than 61 per cent, making it the worst performer among the global indices. The total UAE market capitalisation which was Dh812 billion on October 20, 2005 is down 22 per cent at Dh633.8 billion yesterday despite additional listing of more than 10 medium cap companies during past 10 months.

The recent sell-off across the UAE markets has occurred at a time of high liquidity and near-record oil prices. Analysts expect that despite the high liquidity within the region, the stock market is unlikely to benefit in the near term.

“There is a divergence between the real economy and the stock market which is likely to continue. While the macro fundamentals such as liquidity, GDP and employment growth are on track, markets are unlikely to see any big surge in the short term,” said Shehab Gargash, Managing Director of Daman Value Fund.

DFM index closed unchanged at 396 points yesterday as the Abu Dhabi index closed marginally up at 3437.15 points. The Dubai market traded a record new low volume of 11.2 million shares in the past 20 months.

“We have got into a vicious cycle of low liquidity low volume and low turnover. It will take a while for the market to break free of this,” he said.

Analysts said that liquidity was not the key problem, but the slower rate of growth of liquidity was indeed a problem. A large number of companies expanded their capital through rights issues and IPOs last year when the market boomed.

“The expansion of cash flow through higher liquidity did not support exponential growth across different sectors of the economy, which has been identified by the markets and the correction followed.”

Brokers and fund managers believe that the market slump could have been more orderly and less painful if the banks were prudent enough to recognise the impending correction and made the margin calls on time.

“Banks postponed their decisions until the collapse was imminent and when they did, they cut the lifeline at one go by stopping the margin trading altogether,” said a broker.

Dubai-based Daman Securities said in a report that the law of diminishing returns perfectly holds true in defining the reasons behind the current stock market slowdown. The bull markets seen over the last two years rewarded the investor with higher than expected returns beyond all past predictions. This naturally turned into a new benchmark for expected levels of return sought by eager and optimistic investors. Since the prevailing liquidity did not provide the new expected additional rewards, investors started taking cue's and began the sell off which peaked in April 2006. With the markets having retraced more than a third of its value since the end of last year and if the technical pattern is to be followed, then it will be normal to expect more volatility in the near term as investors will try to re-adjust their positions quickly as markets dictate. In addition, banks and corporates who have portfolio holdings will have to write off their market losses and restructure their balance sheets before starting afresh. That could mean, market factoring in these changes into prices resulting in further volatility.

Bereft of the hype, the market does not have huge expectations on the buyback of shares. With the exception of a few companies such as Emaar and Shuaa, not many managements have announced their plans. “Buyback could ease the liquidity situation in the market. Many companies which raised money from the market in the middle of the liquidity boom should show the responsibility to ease the current tight liquidity situation in the market,” said a fund manager.

Some investors and market intermediaries also fear that the buyback could be used as a tool for insider trading if it is not implemented transparently. “Our past experience shows that investors are resourceful enough to know the management decisions ahead. If buyback results in insider trading, it could hurt the market further.

Major market players view the overall macro environment as healthy and conducive to investments. The current economic situation which reflects higher oil prices, increased government investments, and fiscal budget surplus will provide an excellent set of catalysts for growth. However, there are a number of factors among which geopolitics is emerging a key element affecting the investor confidence. The wider regional political situation remains uncertain and will remain a key unknown factor beyond the control of investors.