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11 December 2023

Local markets feel heat of global slowdown

By Matt Smith




For investors across the world, 2008 has been a torrid time, with the spectre of a US recession threatening to derail the global economy. Closer to home, this unnerving scenario has brought last year’s stock-market surge to a shuddering halt.


The latest round of stock market losses has dominated financial headlines as the US sub-prime crisis claims yet more victims. This turmoil has seen the likes of the Dow Jones Industrials index and London FTSE endure mega losses, with investor panic spreading to the formerly uncorrelated Gulf markets.


Analysts had tipped the region’s exchanges to continue their startling rally of late 2007, as full-year earnings were poised to fuel investors’ hunger for Gulf stocks.


Yet these bullish predictions have proved unfounded for the UAE and Saudi markets, partly because corporate results had already been priced into stocks, but mostly because of the deepening US crisis.


Historically, the Gulf markets have moved independently from their more illustrious global counterparts and this lack of correlation has been one of the key attractions for overseas funds, which have invested in the region as a hedge against a possible economic downturn in mature markets.


But this year, foreign funds have been liquidating Gulf assets to make up for losses elsewhere, poisoning the once-optimistic local sentiment and stopping juggernauts such as the UAE and Saudi Arabian markets in their tracks.


The Muscat and Kuwait exchanges have done well in 2008, thanks mostly to limited international exposure, although in Kuwait’s case the lowering of taxes for foreign institutions has undoubtedly stimulated the market.


Qatar and Bahrain have made modest gains, but the Dubai Financial Market has plunged 5.96 per cent so far this year. This fall means Dubai investors have seen Dh69 billion wiped off the value of their shares.


The Abu Dhabi Securities Market has fared better and is up 2.74 per cent so far this year. However, on March 1, this figure was just shy of 6.0 per cent.


So with local and global markets seemingly in freefall, albeit with the occasional fleeting recovery, should local investors prepare for further declines? No, say analysts, with all those interviewed by Emirates Business unshaken in their belief in the long-term prospects for the domestic exchanges.


“From October last year, volumes picked up dramatically, with the market mounting a major rally. This continued into early January before hitting a correction,” said Ayman El Saheb, Darahem Financial Brokerage director of operations.


“People shouldn’t worry. The market is at a higher level than it was before the start of October, so we are in a stronger position now than we were back then.


“Hopefully the correction is coming to an end and we will start a new upward cycle at a better level than five months ago.”


This forecast of an imminent end to the ongoing correction may ring hollow for many readers who have heard similar predictions before, but it seems the worst may soon be over.


Several factors support this optimistic outlook. First-quarter results will be announced from mid-April and if these figures are as good as analysts believe they will be, then investors should end their US preoccupation and focus on the fundamental virtues of the Gulf’s booming corporations.


“International markets brought the market rally to a halt, however illogical that may be,” said an analyst who did not wish to be named.


“The continued global woes have delayed the start of a new uptrend, particularly this month, but the first-quarter results should provide the catalyst the markets have been waiting for.”


He predicts both the ADSM and DFM will gain more than 25 per cent in 2008, despite the shaky start.


“This figure could be even higher if we have a decent pipeline of IPOs to bring extra liquidity to the market,” he added.


Another promising sign is that real estate, banking and energy remain the dominant sectors on the UAE bourses, with all three industries largely insulated from a wider global slowdown.


Although oil prices may decline to below $100 per barrel, Gulf governments conservatively base spending budgets on a $50 p/b average, so the region’s massive infrastructure projects will continue regardless. The plunging dollar will strengthen the real estate boom as more overseas investors, particularly from Europe, buy into the UAE because they can get more for their cash.


The United States’ chronic current account deficit has been the long-term cause of the weakening dollar, but the greenback’s woes have been exacerbated by six interest rate cuts since September.


The Federal Reserve has slashed US lending rates from five per cent to 2.25 per cent in a bid to stimulate the ailing US economy, while the dollar peg has forced the UAE to follow suit.


Such a move runs contrary to economic wisdom and with UAE inflation topping 10 per cent by most estimates, negative real interest are running at more than seven per cent.


This means investors cannot leave their money in the bank because the value of their savings will diminish in real terms, which should boost local equities.


“People are being pushed to borrow aggressively to try and beat the market and are basically left with two easily accessible options – property or stocks,” said Mohamed Alami, international desk manager for Naeem Shares and Bonds.


Another factor supporting a likely local rally is the long-term bearish trajectory of US markets, so long a drag on the UAE markets.


This is because plunging US stocks has led Gulf investors to recall their cash to the region, with banks reporting bumper cash deposits, but this money cannot lie idle for long.


The retreat to cash has been echoed across the globe, with Merrill Lynch reporting 42 per cent of banks are now overweight with cash. In the longer term, excess liquidity may lead to an asset price bubble, but in the short run should translate into gains for Gulf stocks.


Darahem’s Saheb said: “This year will be very promising for the Gulf markets. There is increasing interest from global funds and the big names are all coming to the region.”


Saheb cited Goldman Sachs’ application for a licence to operate in Qatar as further evidence of the rush towards the Gulf.


He added: “These overseas funds bring extra liquidity in the markets. This year might rival 2005 and the markets are just waiting for a trigger to move up.”



The big fall


Emaar Properties has been the headline loser of the Dubai Financial Market’s descent in 2008. The blue chip, which accounts for 23 per cent of the DFM index, has tumbled 23.8 per cent since the turn of the year, falling from Dh14.90 to Wednesday’s close of Dh11.35.


The property developer has been hit by confusion over its dividend and the cancellation of the floatation of its India subsidiary.


Following a wave of negative publicity, particularly in 2007, international funds have reportedly dumped the stock, while local investors seem to have little faith in Emaar.


Emaar’s mortgage subsidiary has been another to suffer, losing 14.6 per cent in 2008, while Aldar Properties – billed as the Emaar of Abu Dhabi – has dropped 13.2 per cent.