Saturday, Nov 05, 2011

Dubai The UAE’s stock markets are stuck in a rut. Foreign investors are fleeing, local blue-chip companies are losing their appeal and global economic woes are taking their toll on sentiment.

Trading volumes in Dubai and Abu Dhabi have plummeted to levels not seen for years as a result of heightened volatility across international equity indices, leading to a weakened appetite for risk and a lack of interest in the region among institutional investors.

The volume of shares traded in Dubai has plummeted to a daily average of about 107 million against 161 million in 2010 and 470 million in 2009.

The drop has also had an impact in terms of market capitalisation with the Dubai Financial Market (DFM) General Index down 11 per cent since the end of March and the Abu Dhabi Securities Exchange (ADX) down almost five per cent in the same period. At their lowest points, the DFM was down 13.4 per cent and the ADX down 7.5 per cent.

Some respite

There was some respite last Sunday when volumes in Dubai reached their highest daily level since early June after EU leaders agreed a deal to contain the Eurozone’s sovereign debt crisis. However, it was yet another short-lived rally with global markets rattled again by Greece’s decision to hold a referendum on the rescue package.

“Low volumes have been plaguing us for several years now, and unfortunately it is a vicious cycle, whereby the decline in volumes prevents more and more traders from participating and thus leads to even lower volumes,” said Sulaiman Aboulhosn, assistant fund manager at Al Masah Capital.

“The most recent drop can be attributed mainly to the geopolitical turmoil and the outflow of funds from the region. Foreign investors in Europe and the US were led to withdraw their funds to cover margin calls or to redeploy in lower risk asset classes.

“Local indices are proxies for the overall market so we can consider their performance rather than the total market capitalisation, which may be misleading since some companies are very large yet their stocks are illiquid,” he said.

Bouts of volatility

Local bourses are currently closed for Eid Al Adha, allowing investors a little breathing space to consider their options as the world economy lurches from one crisis to another.

International markets have been subject to extreme bouts of volatility over the last few months — primarily due to the United States’ credit downgrade and the sovereign debt crisis in the Eurozone. Local indices are not immune to wild fluctuations with the gloomy macro-economic outlook overshadowing solid company fundamentals — many UAE firms reported strong third-quarter earnings.

“UAE markets have suffered low volumes because of negative sentiment, which means low confidence levels. Investors are not finding the appetite to be risk takers and they do not see the possibility of taking profits,” said Mohammad Ali Yasin, chief investment officer at CAPM Investment.

Slight rebound

“The markets rebounded in March, and we saw a slight rebound in June, but since then there has been nothing. The moment we see anybody move into the market, volumes can easily triple in one day. For example, last Sunday 270 million shares were traded on the DFM; the liquidity is there but the confidence is not,” he said.

According to Ali Yasin, local markets are vulnerable to political statements from abroad and are being held hostage to situations out of their control.

“We need to see more liquidity from within the UAE, not just from events such as an MSCI upgrade. When you do not see a rebound for four or five months you know there is a big problem in the marketplace,” he said.

“Foreign investors are not looking to the UAE. In the United States and Europe they have other investments, such as derivatives and options, and short selling is also permitted. In the UAE it is a case of buying a stock and waiting for it to go up in value.

“Furthermore, we are not seeing any initiatives from government entities or banks; they are not looking at the low valuations and deciding to come into the market. Overall, it could be much worse, but some companies have been hit worse than others,” he said.

Ali Yasin said equity markets could rebound despite the fact the UAE’s property sector is experiencing a correction. Real estate stocks carry some of the largest weightings on local markets.

Correction phase

“Abu Dhabi, in particular, is going through a correction phase, but the fundamentals justify much higher valuations; there is still room to catch up even without a recovery. People’s expectations have gone so low that we do not need any great results to see a recovery,” he said.

Local brokerages are also suffering with many having to scale down or close their operations due to the difficult economic climate. There are 59 brokerages operating in the UAE, down from 110 last year, according to the Securities and Commodities Authority.

Last week, investment bank Al Mal Capital announced it was winding down its brokerage business with the loss of eight jobs. HSBC Middle East Securities, the local brokerage arm of Britain’s biggest bank, also plans to halt its retail operations to focus solely on institutional clients.

“There has been some foreign interest in the UAE markets, but only from dedicated investors; the level of appetite from our clients is different from what it was two to three years ago; there is less appetite but it is not dead completely,” said Joe Kawkabani, chief investment officer of equities at Franklin Templeton Investments.

“Low volumes are not just a problem for the UAE but an issue for bourses across the region. There is a lack of interest and excitement about the Middle East, which is partly due to the global economic situation but also because investors are shying away from equities,” he said.

Kawkabani said the UAE’s big selloff came at the beginning of the year during the Arab Spring, adding that many foreign investors got scared and pulled their cash out of regional markets.

Resilience

“As a result of the Arab Spring, many people sat on the sidelines and tried to understand how governments were going to react. After the second quarter, we entered the lull of the summer — where volumes are typically low — and then we had Ramadan and the Greek crisis,” Kawkabani said.

By Kevin Scott?Staff Reporter

Gulf News 2011. All rights reserved.