Stock markets in the United Arab Emirates reached fresh multi-year highs on Thursday as trading volumes increased, but some said valuations were starting to appear stretched and a short-term correction could be imminent.
Dubai's index climbed 1.1 per cent to its highest close since November 2009 as trading volume hit a two-week high. The index is up 27.9 per cent this year.
The benchmark now has a 14-day relative strength index (RSI) reading of 76.7, with 70 and above considered an overbought signal, and some analysts said this could prompt retail investors to take profits - though any pull-back would probably be brief.
"UAE markets look slightly overheated - they're running ahead of company fundamentals, so a correction is warranted," said Sankar Kailasam, Gulf Baader Capital Markets head of asset management in Muscat.
"If fundamentals do catch up, then more long-term money will come into the market."
Emirates NBD was the main boost to the market on Thursday with a 2.2 per cent gain. The bank's shares are up 78.9 per cent this year; it reported an estimate-beating 31 per cent rise in first-quarter profit before the opening.
"The quality of earnings of the bank has improved over the previous year," Global Investment House wrotes in a research note. "ENBD has managed to rope in its operating expenses."
Six stocks gained more than 3.0 per cent, including Dubai Financial Market and Drake & Scull, which rose 3.5 and 3.6 per cent respectively.
Abu Dhabi's measure climbed 1.0 per cent to its highest close since November 2008, taking its year-to-date gains to 25 per cent. Its 14-day RSI is now at 82.9.
"The catalyst is still the UAE recovery story and the anticipation of strong returns for listed companies exposed to that recovery," said Marwan Shurrab, vice-president and chief trader at Gulfmena Investments.
"We should start to see stock upgrades by research houses to take into account strong Q1 numbers."
In Qatar, the index fell 0.7 per cent, trimming its 2013 gains to 2.8 per cent. It is the second-worst performing Gulf benchmark after Bahrain, with regional investors more interested in other markets.
Doha traded 24.6 million shares this week; Dubai's Drake & Scull saw 72.4 million shares change hands on Thursday alone.
"The pace of Qatar government spending is not matching investor expectations and there has been some frustration building up," said Gulf Baader's Kailasam.
Trading volume in Kuwait hit a 14-month high as the main index took its gains to 22.8 per cent this year. The weighted index, which takes into account companies' market value, is up 8.2 per cent in 2013.
The differing performance of the two measures shows small-cap stocks are the main drivers of Kuwait's rally. Institutions typically trade only in heavyweight stocks.
"It's pure speculation - everyone is positive on the market and there are huge volumes coming in," said a Kuwait fund manager who spoke on condition of anonymity.
Retail investors are borrowing from banks to fund market speculation, he added, boosting volumes.
"They are willing to take on greater risk and put more money into small caps - these stocks were undervalued at the start of the year but are looking over-priced.
"Investors don't mind risking say some 5 per cent of this year's gains because they're already up 20 per cent or more - the weighted index is a better indicator of the real performance of the market."
Sixteen company stocks rose more than 5.0 per cent and all have market valuations of less than $320 million.
National Bank of Kuwait is the market leader and is valued at $15.1 billion, according to Reuters data. It fell 1.0 per cent on Thursday.
Of the 10 largest Kuwaiti stocks, four fell, one rose and six were unchanged.
THURSDAY'S HIGHLIGHTS
DUBAI: The index climbed 1.1 per cent to 2,076 points.
ABU DHABI: The index rose 1.0 per cent to 3,288 points.
KUWAIT: The measure climbed 0.8 per cent to 7,288 points.
QATAR: The benchmark fell 0.7 per cent to 8,593 points.
OMAN: The index rose 0.4 per cent to 6,203 points.
BAHRAIN: The index rose 1.1 per cent to 1,097 points.