Volatility Rules

Economic News

22 Jul 2010
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This week has not been a good one for investors, with the already shaky sentiment in the UAE’s stock markets taking a turn for the worse. Both the Dubai and Abu Dhabi exchanges slumped to their lowest levels in over a year.

On April 24, the Dubai Financial Market (DFM) fell 4.59% to 588.10 points, a 13-month low, while the Abu Dhabi Securities Market (ADSM) turned in a similarly uninspiring session, closing down 2.42% to 3841.11, a 14-month low.

Stocks on both markets took a pounding, headlined by the property giant Emaar and its home finance arm Amlak, which lost 4.3% and 7.1% respectively on the DFM. Abu Dhabi National Hotels was the largest loser on the ADSM, shedding 10%, followed by National Dredging, which lost 9.9%.

The largest loser on the day was Emirates Integrated Telecoms (DU), the UAE’s second telecoms operator, which made its market debut on the DFM on April 22. The new stock lost 13.28%, after it had surged up 126% on the day before.

Analysts, however, were quick to point out that the losses were not exactly indicative of the health of the market.

“I think it’s more of a panic situation than anything. There is no justifiable reason for this to happen and it is just the retail investors trying to get out of the market,” Seif Fikry, of EFG-Hermes, told the Dubai-based Gulf News.

Most analysts point to the fact that the market fundamentals are still strong. The price of oil indeed hit all time highs at the beginning of the week. Analysts also add that first-quarter results have been robust and that all indicators suggest that the economy is as vibrant as ever.

But the precipitous fall has led to some whispering that the market’s poor performance in 2006 might be the correction that onlookers have been predicting since last summer.

Since mid-2005, it has been a rocky ride for the DFM. In June of last year the exchange roared to all-time highs, led by Emaar and Amlak, growing the market value to over 117% of what it was by the end of 2004. As regional markets also were producing historic highs, many international sources, amid the growing euphoria gaining momentum in Gulf markets, warned that a correction should be looming.

Indeed, in July the market appeared to realign itself, falling 22% in the month. But this turned out to be more of an aberration than a trend, as the market quickly rebounded by the end of the summer to again hit record highs in September and again in November, when it crested to an all-time high of 1267.32.

This would be the last time the market would see 1200 points, as trading sagged into December, usually one of the DFM’s strongest months, continuing its slide into 2006. The biggest blow came on March 14, when the DFM plummeted 11.7% to the biggest single day’s loss in the bourse’s six-year history, closing below 600.

Since then, sentiment has been guarded about the market, with investors admitting that they are not sure if recent performance is a lull before another tumble, a return to strength or a sign of the market stabilising.

The dip this week will not do much to convince the sceptics of the market’s strength. Excuses that the poor performance should be blamed on skittish and inexperienced investors hold some water, but also indicate that the market will not really balance out until these people either exit the bourse or exercise more knowledgeable trading actions.

What will also help is an influx of more stocks. It was hoped that the listing of DU – the long-awaited second operator, in which the government still retains a majority shareholding – would have brought some variety and strength to the DFM.

After only a week of up and down trading it is clearly too soon to make any convincing case about the affect of DU, but what is clear is that since last year, the DFM’s performance has been very dependant on Emaar’s stock tendencies. The fall on the DFM in July of 2005 was in step with investor confidence levels eroding in Emaar. In early 2006, when the company disclosed lower than expected annual profits, the DFM accelerate an already downward propensity.

Meanwhile, with a late-week run by Amlak, which surged up 10.3% on April 25, some analysts were preaching that this was the rally they have been expecting. The following day, however, the market took a tumble, as investors engaged in profit-taking on the weakened bourse.

With uncertainty reigning these days on the bourse, a short-term vision seems to be in order for effective trading on the DFM. Most are confident that the UAE markets will soon return to their bullish ways of 2005, because conditions are equal – if not better – than they were last year. So far though, the markets have refused to co-operate. Optimistic investors are just going to have to wait a bit longer.

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