Foreign institutions started to inject new liquidity into Dubai Financial Market (DFM) yesterday, which sharply increased the volume and value to 447.57 million and Dh506.4 million, respectively.
Analysts, however, took a cautious stand towards this new turn of events in the bourse, with most predicting that the move by foreign institutions aimed to cover their short-selling positions.
They doubted that this new flow of liquidity would continue for any length of time, mainly because of a lack of strong news that could support a rebound in the market. The new liquidity focused only on selected stocks and supported them until the end of yesterday's session when they almost reached their upper limits.
The DFM index added 23.25 points, or 1.61 per cent, to close at 1,463.94 points yesterday on strong turnover, 2.5 times more than Monday's session.
Trading focused on a few stocks in the market with Arabtec, DFM, Emaar, Ajman Bank and Air Arabia attracting the majority of the turnover.
Arabtec's stock continued to dominate more than one-third of the turnover, while the DFM stock attracted active trading and acquired 20 per cent of the turnover. This behaviour in the market reflected a new trend among investors, both institutional and high net worth individuals, by re-entering with very cautious movements and on selected stocks.
"We saw some foreign funds that froze their activities in the market for several months coming back, and this was surprising. However, there was a heavy buy trend with foreign institutions since the beginning of the session," said Hosam Al Husseini, head of brokerage at Emaar Financial Services.
"We think most of this buy trend aimed to cover short-selling positions after prices reached very low levels, and there are high expectations that the prices will not retreat significantly in the future."
Nour Al Zou'by, General Manager of MacSharaf Securities, agreed that the majority of new liquidity in the market aimed to cover short-selling positions by foreign institutions.
"This trend was clear with the DFM and Arabtec stocks as some funds that sold their holdings in these stocks several months ago on short-selling movements started buying them back after they reached very low levels. We sew also Emaar's stock advancing significantly," he added.
However, Al Zou'by expected that the injection of new liquidity would not continue for a long period. "This trend came after the three stocks faced strong selling pressures during the past two weeks. They were closing at their downward limits for several consecutive sessions. Now the trend has turned as they are advancing sharply for the third session, and this is very worrying because there is no news or fundamental changes that can justify these movements."
He also pointed out that some stocks with strong fundamentals had seen calm or negative movements. "Stocks such as Gulf Navigation, Aramex or Air Arabia have very strong cash positions and their outlook is very strong compared to the real estate stocks. However, we saw calm trading on these stocks, or in the case of Air Arabia, even selling pressures."
Al Zou'by said that such strong fluctuations in the DFM index would not have any great impact on the general downturn in the near future.
"Strong investors, institutional or individual, are awaiting results of the first quarter of this year before taking any real investment decisions in the market. There is strong liquidity on the sidelines of the market and the movement of this liquidity will be decisive in changing the long-term trend."
"The strong movements in some stocks opened the way for profit taking by speculators in the market and this may drag the index downward. There are also increasing worries about the global economy and the impact of international markets on local ones. There are increasing concerns about the new US administration's rescue plan and we saw global markets retreating on these worries," said Al Zou'by.
Strong turnover may create short-term low
If new liquidity continues to enter the DFM for several sessions a short-term bottom may be seen, according to Hosam Al Husseini of Emaar Financial Services.
"Regardless of the purpose of this liquidity, there is considerable active trading on the DFM now compared to the previous few weeks. The turnover increased in the upward trend and declined in the down trend several times and this is giving positive indicators."
"If the turnover continues in the range of Dh500m and the index can advance to its resistance level over 1,500 points during the next few sessions, this will be a very positive indicator for a short-term bottom in the market."
Al Husseini said there are some indications for the bottom in the near-term, especially through the rally in the index after a long period of calm trading. "We do not expect huge liquidity entering the market at the current stage because investors, especially foreign institutions, will not increase their exposure now. However, active trading reflects an increasing appetite for risk."