The index broke below the 4700 level in intra-day trading to hit 4680 points before last-gasp buying buoyed it slightly. The technical weakness is expected to propel the Dubai market lower in the last three trading days of the month as investor close out positions.
Blue-chips took the major brunt of yesterday’s sell-off in relatively thin trading and overall market capitalisation dropped Dh8.2 billion to Dh446.9bn. Around 159.5 million shares were traded for a total value of Dh677.9m.
Increasing margin calls on leveraged investors has propelled the near-collapse of the UAE stock markets over the past two months, forcing them to dissolve their portfolios to meet the margin demands.
“There is an increase in the practice of margin calls in the UAE markets which will be exerting pressure on the index for more losses. Local banks and brokerages are asking their customers who failed to pay back their loans to sell a part or the whole of their portfolios in the stock markets after prices declined to critical levels. This pressure on investors is worsening an already bad situation,” said Hosam Al Husseini, head of brokerage at Emaar Financial Services.
He said there were increasing selling bids of large volumes in leading stocks, such as Emaar Properties.
“These sell bids came after investors failed to pay their debts or at least the difference between the market value of their portfolios and the amount of their debts. Banks are taking this direction after the local stock markets suffered major loses in the last few weeks, but this will lead to more losses. Emaar’s stock has already reached Dh9,” Al Husseini said.
Buying stocks on the margin was considered sometime ago to be a positive practice that was supporting investments in local stock markets. But it has suddenly turned into a nightmare after prices of leading stocks started declining and reached critical levels yesterday, and local banks started a wave of margin calls to stop potential losses.
Analysts noticed increasing pressures by banks on investors to sell their holdings at very low prices. They voiced concerns about the banks’ practice of allowing investors to get loans against their stock holdings, and then forcing them to sell these stocks at low prices after they declined to the margin levels.
It starts when local banks allow their customers to obtain loans against the stocks they hold. The banks set some conditions for these loans, such as the stocks should be in the most active list, or be heavyweight stocks, and be listed in the stock market for at least two years. The banks always have a list of between 10 and 15 of their preferred stocks.
As long as the value of the stocks is appreciating, the banks keep silent and are willing to offer their customers more loans according to the new value of their holdings. But when the value of these stocks declines, banks always move quickly and give two choices for their customers – pay back at least the difference between the new market value of their portfolios and the amount of the loan, or liquefy their holdings to pay back the loans.
The critical point is that banks are giving their customers between 24 and 48 hours to take a decision about the fate of their portfolios.
Analysts noticed an increase in margin calls in the stock markets since last week and, with the increasing decline in prices of leading stocks at both the DFM and the Abu Dhabi Securities Exchange, the margin call practice by banks is expected to go up even further.
Al Husseini said investors always fail to pay banks during a downturn in the market because they wait for the market to rebound. “But with the increasing pressure from banks, they had to sell stocks at very low prices. We witnessed this situation in 2006 when Emaar’s stock declined to Dh15 and the banks pressurised investors to sell, leading to further losses. The same situation is being repeated since the beginning of last week.”
Noor Al Zoaby, general manager of MAC Sharaf Securities, said the increasing margin call practices by banks would lead to further declines in the UAE indexes.
“The markets are already suffering from a sharp decline in liquidity and the banks are pressurising investors to sell their portfolios at these low levels as part of their stop-loss rules, regardless of the fundamentals or trends in the markets,” he said.
The numbers
159.5: Million shares were traded for a total value of Dh677.9m as blue-chips took the major brunt of yesterday’s sell-off in thin trading
4680: Points was hit at Dubai Financial Market before last gasp buying bouyed it in intra-day trading. The technical weakness is expected to intensify