Special Report: UAE stocks back with a bang

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Special Report: UAE stocks back with a bang

Strong economic fundamentals and Q2 earnings are likely to drive a market rally in the second half, writes Muzaffar Rizvi

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Published: Thu 17 Jul 2014, 11:02 AM

Last updated: Sat 4 Apr 2015, 4:46 AM

The outlook for uae markets remains promising in the second half despite facing some volatility in June as strong economic fundamentals and second-quarter corporate earnings will ignite a fresh rally and attract foreign investment in blue-chip scrips, experts say.

The Securities and Commodity Authority (SCA), the financial market regulator, also plans tighter supervision and reforms to check speculative trading and margin lending. It has set up a high-level committee of experts from the UAE central bank, SCA and share markets that will ensure the soundness and integrity of share trading and prevent any manipulation of stock prices.

The fund managers and analysts term this a positive move to avoid the similar market crash triggered by huge swings in Arabtec shares. The appropriate measures taken by SCA restored the investors’ confidence in the markets and reflected in recent trading as the DFM benchmark index rose approximately 21 per cent since plummeting to a low on June 30.

“We expect second-quarter results in the UAE to be better than market expectations, which should be a major catalyst to drive the markets in the short term,” Saleem Khokhar, head of equities at National Bank of Abu Dhabi’s Asset Management Group, told Khaleej Times.

Positive indicators

For the longer term, he said the UAE’s key macroeconomic indicators remain strong with IMF predicting Dubai’s economic growth at an average 5.6 per cent per annum over the next six years being supported by large-scale real estate projects and preparations for Expo 2020.

“The strong underlying economy should underpin valuations and encourage higher institutional and foreign investor participation. The pipeline for IPOs looks strong and should provide further investment opportunities to investors for diversify portfolio holdings into different sectors of the economy,” he said.

“In UAE, 5.5 per cent GDP growth is expected in 2014. Companies with strong fundamentals and clear cut growth and business strategies are expected to perform well in second half,” he added.

Amer Khan, senior executive officer at Shuaa Asset Management, expressed the similar views and said investors will have a close eye on corporate earnings in key sectors.

“We expect both markets to continue performing well, however unlike the first half where drivers included multiple factors, the second half should see investors primarily focus on the robust and consistent earnings growth we are likely to see across sectors in the UAE,” Khan said.

“We expect markets in the second half to be driven primarily by solid and consistent earnings growth more than anything else. Companies likely to outperform on that basis include Emaar, Emirates NBD and FGB,” he added.

Shailesh Dash, chief executive of Al Masah Capital Management, shared a slightly different opinion and said markets will sustain the upward trend in second half, but at slower pace. “We expect the second half of the year to remain more muted than the past six months, but still expect the market to hold onto the gains it has made so far this year and possibly tread higher, but again at a slower pace than the first half,” Dash told Khaleej Times.

Ups and down in H1

Evaluating the markets performance in first half, Khokhar said both DFM and ADX remained on track and hit fresh peaks during January-May period before experiencing a ‘technical correction’ in volatile trade in June.

“Until the first week of June 2014, performance was strong with ADX recorded 17.8 per cent gains and DFM posted 51.4 per cent growth, emerging as one of the best performing market in the world,” he said.

However, the situation reversed in second week of June as market turned bearish over regional and local issues and some investors booked profits.

“From the second week of June 2014, UAE markets became quite volatile on the back of unrest in Iraq, post MSCI profit-booking, Arabtec management issues and margin calls. The UAE market corrected and overall ADX lost 11.8 per cent and DFM lost 22 per cent during June, bringing first- half performance for ADX at 6.1 per cent and DFM 17 per cent,” he explained.

To a question, he said markets were very volatile and witnessed a sharp correction in post MSCI upgrade period in June.

“In our opinion this correction can be considered healthy given the 100 per cent plus gains seen over the past year and a half. Overall health of the economy remains quite strong and we think this will drive earnings of the companies and ultimately benefit the stocks after Ramadan and summer season,” Khokhar said.

Khan said both markets performed extremely well throughout the first half of the year, despite some volatility in June.

“The market’s gains were reflective of the growth seen on the ground in the UAE, markedly improving earnings through first quarter, investors pricing in multiple catalysts such as Dubai’s Expo win and the MSCI upgrade as well as the expected jump in foreign flows through the upgrade itself,” Khan told Khaleej Times

About the volatile trade in post MSCI upgrade, he said different investors have different time horizons and the UAE certainly has a large percentage of retail investors who typically operate with a shorter time horizon.

“These investors did book gains through June and will likely return to the market post Ramadan. Institutional investors, international and regional, with much longer time horizons, continued to invest through the recent volatility and are likely to remain invested for the rest of the year alongside the new passive emerging market fund inflow the market saw through the upgrade,” Khan explained.

Dash said the Dubai Financial Market General Index followed two trends in the first half of 2014.

“With the first trend continuing the strong performance witnessed from 2013 when the market increased more than 100 per cent last year. For the first four months of 2014, up until early May, the market increased by more than 60 per cent as investors continued their bullish thesis on the market.

“After this strong surge until the beginning of the summer, the market began its downward trend until the end of June where it fell by more than 25 per cent from its high point and ended the first half of the year up just 17 per cent, losing much ground in the process.”

He said the Abu Dhabi Stock Market Index rose 23 per cent until the end of May and then began its selloff for the month of June, falling by 13 per cent from its high and ending the first half of the year up just six per cent.

Elaborating reasons behind recent market volatility, he said a number of factors contributed to the volatile nature of the markets in May and June. Firstly, UAE stocks had performed outstandingly for 16 months running and were due for a pullback in order to consolidate some of the gains that were made.

Second, the UAE central bank came out around that time saying that real estate prices had risen too far with rental yields now being below their historical norm which signaled to investors that further growth is questionable in real estate prices over the short-to-medium term.

Also, most of the Emerging Market status benefits that the UAE had received was already priced into the market before UAE stocks were officially included in the MSCI Emerging Markets benchmark this year.

“Couple these points with it being summer and Ramadan, when volumes are typically lower than other months of the year, and you get a perfect recipe for increased volatility and a market selloff,” Dash said.

Market capitalisation up

Despite erosion of shares value worth billions of dollars in May and June during volatile trading, the market capitalisation in the DFM and the ADX is still up in first half period.

The ADX market capitalisation, which ended at $116.90 billion in 2013, rose to $133.94 billion by July 12. The DFM market capitalisation also improved from $70.71 billion in 2013 to $89.27 billion by July 12, according to latest data from Arab Monetary Fund.

“In the first half of 2014, ADX performed 6.1 per cent up and DFM gained 17 per cent, which recorded the UAE market cap at Dh756.5 billion as of June 30, 2014 as compared to Dh691.2 billion as of December 31, 2013. This shows that UAE market cap has increased by 9.4 per cent in first half of 2014,” Khokhar said.

Dash said both the DFM and ADX made gains in market cap during the first half unlike a general impression.

“The UAE began the year with a total market cap for its stocks at $188 billion and ended June at $206 billion, an increase of almost 10 per cent. During the selloff the total country market cap reached a low of $189 billion on June 22nd which was approximately the same level it began the year at but recovered since then,” Dash concluded.

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