Government measures to boost economy paying off
Volatility has been rampant on UAE stock markets in the first two months of the year and liquidity is restricted to a few scrips.
Sensitive factors like rumours and financial results are impacting the market. "Buy the rumour and sell the fact" appears to be driving investment activity on the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX).
The UAE Central Bank's decision to subscribe to $10 billion (Dh36bn) of the Dubai Government's long-term bond programme has injected a modicum of bullishness into stocks. The news has acted as a psychological backstop in the minds of investors.
After a severe turmoil in 2008, which saw erosion in values by two-thirds on DFM and 50 per cent on ADX, investors and financial institutions are optimistic about the future outlook for the market.
Without the support of foreign investors, the local stock market has managed to register a smart recovery thanks to the increased participation of local investors and GCC-based funds. The question now is sustainability.
Is the recent rebound sustainable? What factors are needed to keep trading volumes and liquidity at higher levels? On the other hand, market experts anticipate that selling pressure by foreign investors is over and trading may take place in sideways movements as some speculative activity at low levels is expected.
Emirates Business spoke to five senior market analysts about the reasons for the rise and fall and what the road ahead holds for UAE stock markets and investors.
The experts are: Mohammed Ali Yasin, Chief Executive, Shuaa Securities; Robert McKinnon, Managing Director of Equity Research, Al Mal Capital; Sanyalaksna Manibhandu, Head of Research, Emaar Saudi Financial Services; Wadah Al Taha, Senior Financial Analyst; and Mathew Wakeman, Managing Director, Cash and Equity-Linked Trading, EFG-Hermes.
Stocks seem to be directionless at this time. Why? How do you see the market moving in the rest of this quarter? What factors will impact this movement?
Mohammed Ali Yasin: I think we have encouraging results that keep markets' upward direction. Positive news such as the government's measures to boost the economy is yielding good results. As a result of this, trading volumes are soaring as investor confidence is booming. The recently announced $20bn bonds are also acting as a major booster of the market sentiment. Not only this, other factors in the economy are also encouraging the market. Moreover, the private sector is also doing good job as it has larger customer base and investor interest. Of course, some of the projects were put on backburner following the credit crunch hitting the market very badly. I expect these projects to see light at the end of the tunnel. In the wake of emerging positive scenario, what needs to be done is alienating concerns about the global factors. On the other side, we are seeing encouraging results being announced by corporates. Some of them are in losses, but we can say that they are better than expected.
Robert McKinnon: The markets are currently driven by short-term sentiment. Considering the extreme uncertainty about the global markets and the health of local companies, we expect the markets to continue to be volatile in the next few months. As the markets see some of the issues (both local and global) resolved, we would expect to see the markets begin to stabilise. However, at the current moment we have not seen any signs that the current environment of uncertainty will abate in the next few months.
Sanyalaksna Manibhandu: Up to about two weeks ago and in agreement with your statement, UAE equities were struggling to find direction amid four-five year low market trading values and index levels. Medium to long-term portfolio investors thought they could re-enter at lower levels. Traders who lost money over the course of 2008 and in early 2009 were biding their time and were also looking to come in at lower re-entry levels.
About two weeks ago, the trading pattern on both the ADX and DFM began to change for the better when the Abu Dhabi Government announced it would inject aggregate Dh16bn via subscription in capital notes in five commercial banks headquartered in the UAE capital. At about the same time, there was market talk of the Abu Dhabi Government signaling to government-related portfolio investors to begin accumulating equities. Concurrently, there were three-four sessions of short covering of DFM-listed stocks by bulge-bracket international investment banks that helped the DFMGI stabilise and rise.
Things took a turn for the worse for bears in UAE equities on February 19 when traders and investors drove up the DFMGI by no less than 5.4 per cent on the session in market volume of Dh1,147.46m, the highest seen since October-end 2008.
While the ADX has underperformed the DFM in the past few trading sessions, the stronger fundamentals of corporate listings in Abu Dhabi over their counterparts in Dubai suggest an extended rally on DFMGI would inevitably lead to catch-up by the ADI and its subsequent outperformance.
The UAE equities outlook amid recent strength is more difficult to predict than it was, say, two weeks ago. Then, it would have been reasonable to expect both the ADI and DFMGI to decline over the 1Q09 from 2008 levels. Given the recent strength on the DFM and ADX, betting on a lower close at end 1Q09 than 4Q08 is no longer a foregone conclusion. Positives that could help UAE equities continue to trend up in the rest of 1Q09 would be news on the financial and property sectors in Dubai. Traders and investors await news on Amlak Finance and Tamweel, with March 15 seen as a self-imposed deadline set by the Committee charged with recommending a way forward for the pair of Dubai-based property financing providers. While up until early in 2009, equity investors and shareholders in the two companies were expecting a merger and further combination with two federal long-term development federal banks, market talk now doing the rounds suggests Amlak and Tamweel would remain as two independent property financing providers. Recent market talk also suggests selected Dubai banks would be re-capitalised and be asked to allocate a portion of any new capital to support property financing activities of Tamweel and Amlak.
If any of the above is close to the mark, the financial and property sectors in Dubai would be revived while shareholders in Amlak and Tamweel might suffer destruction in the value of holdings in the two property financing providers. It is highly conceivable Amlak and Tamweel would return from suspension to official listing and see their stock prices trend to levels on the OTC. One unofficial quotation we hear for Amlak is Dh0.25, some 75 per cent lower than the last close prior to trading suspension.
It is not going to be plain sailing for bulls of UAE equities even should the domestic banking sector begin to stabilise and additional financing help revive the property sector.
UAE equities would find it difficult to sustain headway in the event global equities continue to trend to successive new five-year lows. Crude futures trending to $30/bbl and lower would, moreover, raise doubt as to the capacity of GCC governments to utilise fiscal policy to help offset the global slowdown in expanding their economies in 2009-10.
Wadah Al Taha: Still lack of confidence is the main factor behind this problem, and this problem is related to lack of transparency and the liquidity position in the economy. The changes in the investors' behaviour will create a sign of a new pattern, which may lead to focus on more broad-based rather than selective stocks. This sign was clearly shown on the trading session on February 19, when where Emaar was "neutralised" and around 52 per cent of the total trading value went to DFM and Arabtec. Investors should realise that if there is no sign of improvement or motivation in the real estate sector, then it is hard to imagine that there will be a positive move in the near future. The repetition of such behaviour will lead to a more mature pattern of trading. I strongly believe that the government's steps will accelerate markets' recovery.
Mathew Wakeman: With regard to remainder of this quarter, it seems certain that it will remain a challenging period globally and any glimmers of recovery will more likely be towards the end of the year. The situation, we have, is that markets have priced this in and more so investors are looking to shield themselves from downside shocks.
We are currently in a sideways channel where investors are looking for evidence that the markets have bottomed out. The fact that we are hovering around recent lows and technical support levels make it harder but the improved volume that we have seen is evidence of international buyers returning on a stock specific basis. Battles are being picked more carefully these days and it is no longer better for an investor to buy an index basket as movements are short, sharp and based on individual stock stories or momentum. Stocks with a heavy index weighting are no longer a proxy for outperformance.
A further variable that has entered the investment arena in the past few weeks is local investor speculation that some kind of stimulus plan or support initiatives are being formulated on a Federal level. This has put a temporary floor in the market as buyers are happy to sit lower and wait for weakness to build positions. We are now approaching the stage where we need to see some news flow on these issues to keep us at these levels at a time when global markets continue to see weakness.
Market confidence can only be restored with markets stabilising on a global level. Even then I would expect a lag before we see sentiment rise here as risk appetite may take a bit longer to come back.
Foreign investors appear to be moving in and out rapidly. Are you seeing any diversion of foreign investors from the UAE market to other GCC/ regional markets? If so, why?
Mohammed Ali Yasin: We had been attracting foreign investors into the market, which offers more room for further growth. Only during the recent past, there was dip in foreign investors' trading volume because of several reasons such as global banking majors became bankrupt, economic activity has been slowing down, investments in different segments have been blocked. However, foreign investors are back again, but a majority of investors are going for short-term gains only. So, I consider this short-term trading as speculative activity and it is not good as it results in high volatility. I think, as long as market is volatile, foreign investors would continue to trade in the region and make profits. Because of increased foreign investors' activity, mutual funds are gaining momentum as it is improving their performance. This is also a good sign in the market for investors.
Robert McKinnon: We are seeing very little activity at the moment from European and US investors. Currently, the local markets are driven by regional capital flows.
Wadah Al Taha: Foreign investors (mostly institutions) have different views and different objectives. I believe that some institutional investors would like to compensate what they have lost during the last few months, this is why they have increased their trading turnover. In other words, some of them would like to compensate through "quicker in and out" and obviously this is a speculative behaviour. Many other institutional investors have not yet returned to the market, the recent increase of trading value is considered as a positive factor and motivate them to enter.
For the foreign investors, I think that UAE and Doha markets are the most attractive in the GCC, and diversification available in UAE is wider. It is worth mentioning that international institutional investors are allocating certain percentage from their funds to the emerging markets. Keeping the attractiveness of certain market high is not only through cheap prices, but a "a bundle" of factors on top of it is transparency and related legislation environment.
Mathew Wakeman: There was certainly some GCC rotation of stock positions early in the year when investors sold in countries that ended 2008 strongly such as Qatar and Kuwait, to buy in the UAE and Saudi Arabia.
This is still evident now but less so from Qatar and Kuwait. Saudi Arabia's decision last August to allow foreign investors access through swap structures has attracted a lot of investor interest given the high volume and breadth of the listed stocks. Valuations are attractive everywhere now but what attracts investors to Saudi apart from the obvious oil reserves, is the huge infrastructure spending that is ongoing this year. The fact that much of the development is at the early stage of the curve means it is less exposed to real estate concerns. This is why foreign investors were quick to reduce exposure to markets highly weighted to real estate such as the UAE. Stocks are now at levels where the 'game over' scenario that was priced in is being seen as overdone and offering short term upside potential.
Liquidity is confined to a few scrips. Why? What measures are needed to promote activity in other stocks?
Mohammed Ali Yasin: I think this trend will continue because some scrips have become very popular among investors and some are able to attract foreign investor holding. There could be several reasons for this. In any market, there will be fewer scrips that are able to hog the limelight. We cannot expect all the listed companies would get equal attention of investors. Moreover, foreign investors look for companies that are more open to them. However, active trading in fewer scrips will also spread to other stocks gradually. As the confidence level improves further, long-term investors will be back to the market and this will boost up the liquidity in other stocks too. Of late, trading volumes are improving reasonably. The total trading volume was Dh9bn in January 2009 as against more than Dh100bn in the corresponding period in 2008. Because of increasing trading volumes, there has been brisk activity in February too.
Robert McKinnon: Liquidity is driven by many factors. In most cases a lack of transparency is a big reason for a lack of investor interest. In this environment, companies need to improve transparency if they want to encourage investment in their equity.
Sanyalaksna Manibhandu: Portfolio investors and traders are attracted to a stock for two or three reasons, if valuation considerations are put to one side for the moment. First, does the stock have a reasonable free-float? Second, does the stock represent a key sector in the economy? Third, is the stock open to foreign portfolio investors?
In answering the above three questions, investors are mostly drawn to selective banking and property counters on the ADX and DFM. Exceptions to the rule lie in DFM, Air Arabia, Dana Gas, du and Gulf Navigation. Many portfolio investors would like to invest in Taqa and etisalat, but are barred in differing degrees from doing so if they are either institutional or foreign investors or both. Measures needed to promote activities in other stocks include: 1) increasing foreign limit; 2) boosting free float; 3) educating retail investors of the risk-diversification benefits of investing outside the banking and property sectors.
Wadah Al Taha: The liquidity in the market is still very limited and almost dried out in many sectors. The financial sector is clearly suffering. Statistically, during the previous year, concentration on certain stocks was there, but in the same time, the tendency toward this pattern is changing. The negative impact on real estate and banking sectors (mainly) will impose a new equation. Other than this fact, companies must realise that transparency is a key factor to gain loyalty of existing investors and potential investors. The monitoring process in this regard is below average and a lot of work is required in this area.
Mathew Wakeman: I do not think stock specific activity is something to be looked at as a problem as it illustrates the evolving maturity of the investor base and its ability to look at stock specific opportunities and the defensive and speculative nature of certain sectors. Measures to promote activity in stocks never work; the stocks need to earn the investor interest themselves through performance, earnings and dividends.
Equities have become less attractive than fixed income schemes. What factors will infuse fresh confidence in stocks?
Mohammed Ali Yasin: High volatility coupled with lower returns had forced investors to move away from the trading. During the crisis times, when nobody can predict the future, investors started investing in fixed income, but stable, schemes of banks. Financial institutions also joined them to earn low-level income in short term rather than losing money in the uncertain market conditions. In such conditions, ability of economy also matters a lot. Because, I believe that fundamentals of economy should cope with any unforeseen economic crisis. To support this, banks should provide responsible lending to the market. For an instance, look at Arabtec, it dropped to Dh0.85 before going up to Dh1.60 and again it is doing well. This is despite the fall in index level. Handsome returns in some scrips will definitely boost the investor sentiment. More and more good news about government measures, banks proactive act, etc, will infuse new confidence into the market. This will get further boosted as more number of investors return to the market.
Robert McKinnon: First, the global economic environment needs to improve.
Sanyalaksna Manibhandu: Investing in fixed income securities and time-deposits is a manifestation of portfolio investors' elevated risk aversion and flight to relatively less risky asset classes. When investors perceive the banking sector in the UAE as sufficiently capitalised and able to 1) absorb potential loss from the ongoing slowdown and 2) re-accelerate loan growth, particularly to the property sector, investors would re-build equity positions. Interest rates in the UAE continuing to decline would, moreover, render equities relatively more attractive than parking savings in deposit accounts.
Wadah Al Taha: I agree that equities have become less attractive, but the attractiveness of the income schemes is already limited, especially on the individual level in the GCC. Today the core of confidence is the government. If we are looking for faster and reliable recovery, the intervention of government or semi-government parties is required. It will send a strong massage that the fundamentals of the economy will be better.
Mathew Wakeman: A rotation of investors into fixed income, namely sovereign paper was seen last year in unprecedented size as investors sought capital security due to risk aversion being the highest in a generation. We saw yields in the US at near zero on short- term paper as investors stopped trusting banks with deposits regardless of the interest being offered.
Where we are now is that liquidity is slowly returning to the system and banks are being supported by governments on a near daily basis. Where does this leave equities? A significant amount of bad news is priced in and everywhere is considered 'cheap', but this doesn't mean we won't fall through support levels and look to consolidate lower and so investors remain cautious and much more short term in nature than before. The low prices of stock in the region now increase the volatility and this benefits short-term traders, so if your mind set is right and you can be nimble there is money to be made.
Confidence in stocks will be led from western markets and will filter through to us later as we need global consumption and sentiment to rise to impact us hear. Emerging markets traditionally need two elements to perform well, a strong market for basic resources and good risk appetite, both these variables have been under pressure and look set to recover slowly.
What is your view on transparency and corporate governance in UAE's listed stocks?
Mohammed Ali Yasin: The issue of transparency and corporate governance is an ongoing process, which will never end at any point of time. Real interest about transparency and corporate governance should come from the top-level management and public companies. However, we have reached to remarkable level in implementation of transparency and corporate governance in the region.
As there is an increasing awareness in the industry, all the companies are willing to adopt transparency and implement corporate governance. And most of the companies are moving up the value chain in terms of higher global standards in protecting investor interests. The very objective of total transparency and corporate governance is to protect minority investors. Despite our progress in corporate governance, we have a long way to go.
Awareness among top management and other professionals across different sectors needs to be improved. In adhering corporate disclosures norms, I see an encouraging response from all the listed companies as more than 85 per cent of companies have already reported their financial performance. Most of the companies have submitted their numbers and only fully audited reports yet to be completed.
Robert McKinnon: UAE equities would probably rate very poorly by global standards in terms of transparency. Timeliness of information is limited and communication with the investment community is also limited.
Sanyalaksna Manibhandu: UAE transparency and corporate governance levels can only improve. Progress in the past 24 months or so is seen in the setting up of investor relations departments by listed companies in both Abu Dhabi and Dubai and in increasing numbers of conference calls being hosted for the benefit of both equity investment analysts and portfolio investors.
Immediate improvements could come from the quality and timeliness of information flow from IR departments. Moreover, many listed companies do not have IR departments or host conference calls, which should change. Last, some listed companies continue to only release corporate notices in Arabic, flying in the face of the oft-stated intention of projecting UAE equity markets as internationally investor-friendly financial exchanges.
Wadah Al Taha: Many listed companies are far from implementing the basic requirements of corporate governance as stated by the Securities and Commodities Authority (SCA) of the UAE and I doubt that companies can comply with the deadlines for each stage. The monitoring by SCA is way smaller that the scope of work in this regard. Dramatic changes are required to reach smooth and effective implementation.
Mathew Wakeman: Uncertainty can be more damaging than reality, especially where corporate earnings are concerned. We saw the benefits of reporting quickly in Saudi Arabia this quarter where even though some figures disappointed compared to estimates, the market may have priced in worse and investors are able to make more informed investment decisions. Investors who draw their own conclusions where a lack of transparency is concerned are often more negative than positive. UAE companies have adapted considerably in recent years as increased international investor involvement demanded increased transparency. This has benefits for local retail investors too.
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