More Stability

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The recent decline on Dubai's capital market was nothing more than a normal albeit rather sharp market correction, with some observers thoughtfully preferring to call it a "reaction".

Gulf Cooperation Council (GCC) stock markets have plunged since the beginning of the year, losing nearly 40%. The majority of the regional markets were again in the red at the beginning of the week, as Saudi Arabia's Tadawul All-Share Index shed nearly 3% on November 26, hit by all around selling. Oman and Kuwait also closed lower, while the Dubai Financial Market (DFM) market index closed at 356.52 points, hitting another 52-week low. The DFM has lost nearly 65% this year. Over the last few days, daily trading volume on the DFM reached a mere Dh200m ($54.4m), down from the average trading volume of Dh800m ($217.8m) to Dh1bn ($272.2m). In addition, the overall market price-earnings ratio for the UAE stood at 13.4, down from its peak of 24 and the healthy average of the 15-17 range.

Commenting on these performances, Hamood Abdullah al-Yasi, the general manager of Emirates International Brokerage, told OBG that the correction was expected as the stock markets were simply following the conventional "waves cycle", with its upward and downward trends.

Indeed, the recent plunge follows a period of exponential growth. As a case in point, the DFM has become one of the most active markets in the Middle East. The DFM has expanded both in terms of the total number of firms and in terms of diversity. Between 2002 and 2005, the DFM grew by a strong six-fold.

Many factors accounted for this boom, and they ranged from excess market liquidity in the wake of higher oil prices, to better macroeconomic fundamentals and good corporate results.

In addition, an array of Initial Public Offerings (IPOs) not only boosted the market but also investor confidence. Consequently, a number of firms have engaged in capital market-related activities, such as banks and insurance companies. Regional liquidity also poured into the DFM, particularly from Saudi Arabia after the repatriation of capital to the region after September 11, 2001.

As a result, there was a doubling or tripling of some stock values, but most of these stocks were described as "extremely overpriced", hence the expected correction. Furthermore, the DFM remains small in size, as there are only 45 listed companies, with real estate giant Emaar accounting for some 50% of market capitalisation.

Oubada Duwaji, Head of Discretionary Investments at Shuaa Capital Asset Management Group, told OBG that the current "reaction" could be described as the well-known capital markets phase when the market gets rid of unsuitable investors.

Indeed, several factors account for the reaction, both local and regional.

The Dh1.6bn ($435m) DFM IPO was 280 times oversubscribed, according to a statement released by the DFM on November 26.

The regional stock markets have been assuaged from over-evaluation and retail speculators. It is now a prime attraction for international and institutional players to step in, driven by low valuations and strong macroeconomic fundamentals.

In addition, international investors seeking to invest in Saudi Arabia see the region as a " block" with Dubai as major "side kick" and a conduit to value investments. Along with a sound banking sector, there should be more stability and more growth for the market, after an initial period of consolidation, which actually started on November 27, with a flat market. The market is currently undervalued, with benchmark stock Emaar Properties trading at Dh11.50 ($3.13), a new bottom, while its fair value should be around Dh18.74 ($4.90).

A surge in private equity and in mergers and acquisitions, eventually followed by more IPOs is expected. In the wake of private equity giant Carlyle's announcement to open its regional headquarters in Dubai, it is likely that the market will see the arrival of professional private equity players. All of these along with the upcoming new market index indicate that the market is heading towards maturity.

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