Booming margin trading in the UAE may jeopardise the solid performance of the country's stock market as investors scoop up share offers with borrowed money, bankers say.
They fear the UAE primary market may be overheating - and that if the current boom turns to bust investors will shun UAE equities for many years.
"We are very concerned about what is happening in the nascent IPO market," Iyad Duwaji, chief executive of Shuaa Capital, a Dubai-based investment bank, told Reuters.
Bankers cited as an example the initial public offering of Abu Dhabi-based Addar Properties, which closed in late November more than 450 times oversubscribed.
They estimated around 80 per cent of the money for the IPO in Addar, a real estate company part-owned by the government of Abu Dhabi, came from margin loans.
"If investors get burned in one transaction, they may lose confidence in capital markets, which is not what we want," added Sanjay Vig, head of capital markets at Emirates Financial Services, the investment arm of Emirates Bank International.
The UAE stock market has so far performed strongly in 2004, with the Shuaa Capital general index rising 74 per cent on the back of strong corporate earnings, low interest rates and high liquidity on the back of high oil prices. The UAE stock market is trading at a forward P/E ratio of around 20.
But Emirates Financial Services' Vig said he feared the rise of margin trading in the UAE could herald a repeat of 1998, when many UAE investors are believed to have lost heavily on the over-the-counter market.
The market fell sharply following a steep rise, leading to a loss of investor interest in UAE equities that lasted several years. Two formal bourses in Dubai and Abu Dhabi were launched in 2000, a move that has helped to restore confidence.
Krishnan Ramadurai, senior director of the Financial Institutions Group at Fitch Ratings, said some UAE banks may be at risk of ratings downgrade if their loan portfolios become too dependent on margin loans. "It is something we will be looking at," he said. "In the euphoria, banks can do it (margin lending) as a mass product. But ... when markets turn, everybody heads for the exit door."
Gulf News
