The Dubai bourse slumped to a new 53-month low as panicking investors sold up following declines on Asian markets and a further fall in oil prices, plus increasing fears over Dubai's real estate sector and more bad news from Western banks.
Analysts had hoped a feel good factor from Barack Obama's Presidential inauguration would help the Dubai Financial Market to recoup some of its early week losses, but it instead dropped 3.67 per cent to 1,547 points.
With UAE markets stubbornly linked to their global counterparts, local investors were frightened by an early morning slump in Asian shares and the collapse of United Kingdom banking stocks amid the increasing likelihood that a swathe of British lenders will be nationalised. The British government has announced a second bailout for its teetering financial sector, while Royal Bank of Scotland is poised to realise the biggest corporate loss in UK history.
Meanwhile, Nymex crude slumped to below $33 a barrel, which means it has fallen by a 10th over the past week and is down by 75 per cent from July's all time high of $147.
Dubai-based HSBC Economist Simon Williams has warned the Gulf states will fall into recession if crude drops below $25 a barrel, Bloomberg reports.
"The correlation between oil and the domestic stock markets is not perfect, but when all the other news is negative, the latest slump in crude only hurts equities further," said Sanyalaksna Manibhandu, Emaar Saudi Financial Services head of research. "Oil forward pricing shows traders expects crude to recover in 2009 and if that happens it will obviously be positive for this region."
The Gulf states have enjoyed huge surpluses for almost six years and so have built up sufficient reserves to prevent their major infrastructure projects being jeopardised by crude's subsequent fall, analysts say, while governments will probably increase spending to stimulate their ailing economies.
Ominously, the DFM's decline yesterday was its largest one-day reverse for 19 sessions and its sixth in succession, while the index has also slipped below the critical support of 1,550 points. All active sectors were mauled, with losers outnumbering gainers 20:2, but it is Arabtec's woes that have scared investors the most, with the construction giant falling the maximum 10 per cent to Dh1.26.
"Arabtec's order book has shrunk dramatically as contracts are cancelled," said Manibhandu. "The company's fortunes are inextricably linked to the Dubai property sector and while most people expected it to suffer, its sufferings are worse than even the previous worst-case scenarios."
This is worrying investors that real estate is facing an even steeper downturn than forecast. Emaar slipped 6.81 per cent to Dh2.05, its lowest finish since June 5, 2004, while DFM Company posted a new all-time low of Dh1 following a 9.9 per cent fall.
With the index in such dire straits, it is no surprise that a swathe of other companies have slumped to similar milestones. Of the 10 largest active stocks on the DFM, six are at two-year lows – the four others are du, Deyaar, Dubai Investments and Commercial Bank of Dubai – while two more – Dubai Islamic Bank and Air Arabia – are a couple of fils away from joining this group.
"Yesterday was grim, but expected," said Manibhandu. "Before Christmas we were talking about the market falling to 1,400, which is the first target for the bears, and one would have to see that happening now. This mark is not far away and we will then discover how investors will react. This could spark a rebound or there might be further downside."
DFM turnover falls to Dh244m
ubai's turnover fell by almost a third to Dh244 million, with DFM Company, Arabtec and Emaar again dominating trading. DFM Co was the most active in cash terms, with Dh87 million of shares traded, followed by Emaar's 62m and Arabtec Dh44m.
Combined, this trio accounted for four-fifths of the market turnover.
"Crucially, we are still waiting for an improvement in liquidity," said Sanyalaksna Manibhandu, Emaar Saudi Financial Services head of research. "The UAE Central Bank has reduced the benchmark rate to one per cent, but the market determined rate – the three month Emirates Interbank Offered Rate (Eibor) – is still nearly four times higher at 3.9 per cent."
"It has stabilised and dropped somewhat over the past month, but it will only fall substantially when there is more liquidity in the financial system. Equities should then go back up, but I do not see this happening until late in the second quarter. Trading volumes have collapsed and are even lower than late last year. Investors may be waiting for the fourth quarter numbers to be released, but these would not start to appear in earnest until late next week or early February."