Slack monetary conditions and buoyant crude oil prices will help drive the UAE stock markets higher until the end of June, although a weakening global economic outlook and stubborn inflation could yet curtail their rise.
These factors will be the most important in determining the fate of UAE equities in the medium term, according to Emaar Saudi Financial Services, together with seasonal stock trading ahead of the end of the first half of 2008. "Local portfolio investors in the UAE see a certain seasonality to their equity markets," an ESFS report states.
"In particular, investors expect the low in equities in the first half of a given year in February or March to be followed by a trend up in market indices that could last until the middle or end of June," it said.
This phenomenon is created by a number of factors, the first of which is the corporate calendar. This sees companies publish the full-year figures towards the end of the first quarter of each year, while annual meetings and subsequent dividends announcements are also staged around this time.
With the headline profit and income figures long known prior to the completion of full-year results, there is little to move investors before quarter earnings are announced in April and May, ESFS says. "The corporate calendar helps bring about a fall in investor interest that tends to reach a low point by the end of the first quarter and to boost investor interest in early second quarter. The corporate sector also pays dividends from April and provides portfolio investors with additional cash to put to work over the rest of the second quarter."
The social calendar also plays a part, with many local investors closing their portfolios ahead of a summer exodus in July and August.
This results in a spike in trading activity as the end of June nears, with a marked decline thereafter.
Human behaviour is another driver of a market surge between April and June. Under pressure fund managers are likely to find themselves behind revenue targets for the first half of 2008 following a slow first quarter, spurring them into more aggressive trading to try to make up for lost time in the next quarter.
The UAE's economic momentum is likely to slow in 2008 along with the rest of the world. However, it will still outpace other regions and so will continue to be an attractive destination for foreign funds.
In the two most recent global downturns – the Asian financial crisis of the late 1990s and the dotcom bubble in the early part of this century – UAE real GDP growth decelerated, most notably in the oil sector.
However, the world economy has changed markedly since these periods, with 90 per cent of new oil demand coming from other emerging markets, most notably China, and so oil revenues are unlikely to suffer unless a United States recession is particularly severe.
ESFS is cautious, warning the dirham's dollar peg has left UAE authorities with little freedom to formulate an independent monetary policy, forcing the Emirates to follow US interest rate cuts, even though this runs contrary to conventional economic wisdom. "The combination of a slowing global economy and a limited head room for expanding fiscal policy should, we believe, contribute to slower economic growth in the UAE in 2008," ESFS adds.