News, not earnings, to shape UAE markets' direction in 2011

Low investor participation and structural impediments are curtailing recovery, say analysts

Following a bearish 2010, the performance of stocks on the UAE bourses is expected to be more news-driven than earnings-driven this year, analysts maintain.

Last year, Abu Dhabi Securities Exchange (ADX) slipped by 0.87 per cent, while Dubai Financial Market (DFM) lost more than 12 per cent.

"We think it will be a volatile year, as investor confidence remains fickle after a difficult 2 years. Market action will be news driven as opposed to valuation or earnings driven. Things to watch will be further news on debt restructurings for major GRE's, structural changes in UAE bourses (e.g mergers, inclusion in MSCI indices)," Khaled Masri, Head of Brokerage, Rasmala Investment Bank, Dubai, told Emirates 24|7.

He said valuation-wise markets don't have much downside but low investor participation and structural impediments have curtailed any recovery.

"The UAE markets are very cheap in terms of valuation. However, the key issue is that investor participation is very subdued to take advantage of low valuation. We don't see any downside as valuations are cheap already, and thin trading volume and low liquidity indicate there is not much left before investors to sell.

Going forward, we believe the market could remain sideways but volatile this year," added Masri.

Parallel to it is the view that looks for some positive developments in the year ahead.

"For 2011, there are a few positive developments to look at. First of all, the market is at the lower end of the valuation both on absolute as well as relative terms," Fadi Al Said, Senior Investment Manager & Head of MENA Equities, ING Investment Management, Middle East.

"Additionally, if you look at the real estate cycle globally, usually the market bottoms out between 3 to 5 years in terms of pricing. In UAE, therefore, after having seen three years of real estate correction so far, there's a probability that we might see the market reaching a trough in terms of real estate prices next year. This could be very positive for the overall investor sentiment in the UAE," he said.

Further, he pointed out, banks provisioning might also reach a peak next year.

"Usually, peaks in provisioning are a good sign of a turnaround in the banking sector that would in turn impact investor sentiment in the stock market," he added.

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