Sideways trading is projected to continue dominating the Dubai Financial Market (DFM) after a day of strong fluctuations yesterday, which ultimately saw the index gain 27.41 points, or 1.57 per cent, and close at 1,771.32 points.
The session started with a strong buying trend that pushed the index to 1,790 points – its upper resistance level – but the trend changed dramatically to profit taking during mid-day trading and the index slipped more than 50 points. It changed again by the end of the session due to strong buying on selected stocks.
The turnover was moderate compared to trading during the last month as 245.5 million shares changed hands at a total value of Dh401.1 million. The real estate sector continued to dominate turnover, including Emaar Properties, which advanced 3.16 per cent to Dh2.61, and Arabtec, which declined by 7.26 per cent to Dh2.17.
Analysts expect the sideways trading to continue in the market during the first quarter of the year as the current price levels have already factored in the expected loses of companies during 2008. The results of the first quarter this year will be decisive in creating a new trend in the market from Q2 of 2009.
"There is a good turnover in the market but this is speculative liquidity, not long-term investments. Around 70 per cent of this turnover came from very short-term trading by speculators who are recycling the same liquidity several times during the same session through in and out strategies. There is no real new investment in the DFM so far," said Waleed Al Khateeb, Trading Manager at Daman Securities. "This strategy is clear in the strong fluctuations in the DFM index during the same session, which started with a strong upward movement, which failed to break through the resistance level. Investors then turned to profit-taking."
However, he said the DFM has shown a strong and unexpected rebound at the beginning of this year and the profit-taking trend dragged the index down only slightly. "This is giving positive indicators of reduced selling pressures in the market. Investors are focusing at the current stage on short-term movements due to a lack of confidence and uncertainty over the long term.
"Also, they are awaiting the final results of listed companies in the next few weeks. However, the current level of prices in the market is very encouraging for investors and the 2008 results will be critical for new liquidity," said Al Khateeb.
He also cited a new trend among institutional investors to build up their portfolios from low levels. "Institutions were liquefying their portfolios at the end of 2008, but now they have started to build new portfolios for 2009. They are entering the market with limited liquidity and this will hold the DFM index during the next few sessions."
Wadhah Al Taha, a senior market analyst, agreed that fund managers and institutions were returning to the market with limited liquidity and on selected stocks.
He cited two main behaviours in the DFM since the beginning of the year that are contradictory and are leading to the strong fluctuations in the index.
"The first behaviour is the trend seen among fund managers, institutional investors and high-net worth individuals who have strong liquidity on the sidelines and are trying to build positions for trading in 2009. They are entering the market at the current low price levels on selected stocks that have very encouraging market-to-book value and P/E ratios. They are focusing on selected stocks that they expect will show good performance this year. From the accounting point of view, losses suffered in 2008 have already appeared in the results of funds and now fund managers are preparing for a new year in which they will try to be profitable.
"The second behaviour represents the trend among existing investors with strong portfolios in the market of restructuring their portfolios. The current economic developments have created new realities and both fund managers and individual investors are restructuring their investments according to the new trend. We see this category selling and buying stocks at the same time, creating this strong fluctuation in the index," Al Taha explained.
He added that the restructuring process of institutions' portfolios depended on three levels: markets, sectors and stocks. "Fund managers are diversifying their holdings in different markets in the region, as noticed through increasing institutional investments in the Abu Dhabi Securities Exchange after it showed less volatility than the DFM. They are also shifting their holdings in the banking and real estate sectors to others due to negative expectations in these two sectors."
Speculation to rule Q1
Speculation is expected to dominate trading on real estate and banking stocks during the first quarter of this year, said Wadhah Al Taha, a senior market analyst.
"The results of the first quarter will be critical for the attractiveness of listed companies in banking and real estate sectors due to the negative impact of the global financial crisis. Investors will take to short-term trading on these stocks until results of the first quarter show the expected performance of listed companies," he said.
Al Taha also predicted that long-term investments would focus on more stable sectors, such as telecommunications and services.