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UAE Equities Endure a ‘Turbulent’ 2009

Before Dubai World stunned and triggered a major selloff in global equities, UAE bourses were on a roll, and were gearing up for a bigger fourth quarter surge. Except for a subdued first quarter, when wary investors still reeled from the 2008 financial crisis, stocks were steadily climbing in the second and third quarters. Retail investors were pinning their hopes on a global economic turnaround, while fund managers were plowing back money into emerging markets.

Stock exchanges in Dubai and Abu Dhabi, like equities elsewhere, were moving higher on signs that the US, the world’s world’s largest economy, is starting to stabilise, while three of the world’s six largest economies — Germany, France and Japan — snapped out of recession in the second quarter.

On the domestic front, investors were eagerly awaiting the second tranche of the Dubai government’s $20 billion bond programme, after reassurances by the government that it will be well-received in the international debt markets.

The Dubai Financial Market had gained nearly 28 per cent up until that fateful November 25, but barely two weeks later, declined by 19 per cent. Volatility increased in the Dubai bourse and gains so far are up by just 9.4 per cent, as investors continue to fret over the restructuring plan of state-owned conglomerate 
Dubai World.

The main index of the Abu Dhabi Securities Exchange eked out gains of 21.8 per cent prior to the Dubai World stunner, and dropped 10.2 per cent until December 14, when Abu Dhabi threw a $10 billion lifeline to keep Dubai from defaulting on its loans. Abu Dhabi bourse is gradually recovering, and is now up by about 14.7 per cent.

Both bourses, obviously, are far from recouping the losses they’ve suffered in 2008. Dubai bourse shed more than 70 per cent of its value in 2008 and Abu Dhabi lost nearly 50 per cent last year.

“The Dubai World debt announcements were certainly a banana skin for the markets, as investor confidence takes years to build up and seconds to lose,” said Matthew Wakeman, managing director at cash-and-equity-linked trading at EFG Hermes.

Dubai World paid off a $4.1 billion Sukuk loan of its property arm Nakheel PJSC, and by early January, will submit to its creditors, a debt restructuring plan for some $22 billion of maturing liabilities.

“Optimism about the pace of economic recovery was the overriding theme that pushed the markets steadily higher up to November. Compare this to the correction in 2008, where investors were pricing in a very gloomy scenario that failed to materialise,” said Wakeman.

There were other things favouring the UAE bourses prior to November. Aside from improving sentiment about worldwide growth prospects that lifted prices of crude oil, prices of metals and other commodities essential to the global economy, were also rising.

Crude oil prices, the best barometer of economic health for Gulf petroleum exporters, hovered above $70 a barrel. This prompted investment bank EFG-Hermes in August, to raise its forecast for 2009 oil prices to an average of $60 a barrel from its previous estimate of $50. It lifted its oil price outlook for 2010 to $70 a barrel from $65.

“The resilient oil price has meant that Gulf economies have been able to drive forward with spending plans without having to run large budget deficits, and this spending has been key in helping the nations to come through the global downturn,” said Wakeman.

However, while there were sporadic signs of economic turnaround in some of the major economies, the reality was different in other parts of the globe.

Marwan Shurrab, vice-president and chief trader at Gulfmena Alternative Investments said that as a result, major foreign funds hardly had a significant presence in the local markets, and this also contributed to the underperformance of the 
UAE markets.

“Many of these companies were also hit by the global recession, this affected their businesses, so they shifted their focus from equities to their core businesses to weather the 
financial storm.”

The volatility of the dollar throughout the year, to which most of the Gulf currencies are pegged, also limited the markets’ gains, 
added Shurrab.

“This negatively affected our investments as the weakened dollar hurt the inflow of capital into 
the region.”

Smaller events threw off the UAE markets during the year, including the planned, and subsequently, the failed merger of Emaar Properties with the property unit of another government-controlled company, Dubai Holding. In a joint statement, the companies said the decision was based on findings of feasibility studies, which showed that a merger was not ‘economically viable for now.’

The merger plans were scrapped, ostensibly, as Emaar Properties had been getting a lot of flak from shareholders, worried about a dilution of their shareholdings.

Emaar, which is Dubai’s most heavily-traded stock, is one of the best performing stocks, and its shares were up by 75 per cent this year, as investors remained upbeat about the company’s overseas projects.

As the global economic slump hit markets, there were also few acquisitions and IPO activity. The Dubai bourse had two listings in the year — contractor and and engineering company, Drake & Scull International had its debut on March 16, and HITS Telecom listed on December 23.

Towards the end of the year, consolidation among corporates snowballed into the exchanges as well, with the Dubai Financial Market PJSC announcing on December 22, its offer to buy rival exchange operator Nasdaq Dubai for $121 million.

Analysts’ view of the merger was mixed, with some seeing the move as a failure by Nasdaq Dubai to drum up business for foreign investors.

The buy offer, which has been approved by Dubai Financial Market’s majority owner, Borse Dubai, and Nasdaq Omx Group, which controls one-third of Nasdaq Dubai, comprises $102 million in cash and 40 million shares of DFM.

“This deal is advantageous for DFM since it would give us access to a new platform, including one of the biggest Sukuk markets,” Essa Kazim, executive chairman of DFM PJSC, previously told Khaleej Times.

“It will provide choices for companies to list under another regulatory framework, and we will have a much wider asset class. We will certainly benefit from the revenue side, we will be able to benefit from the economies of scale, and streamline our costs as well,” added Kazim.

Kazim had said that unifying the two bourses would strengthen Dubai’s role as a centre of capital markets. He said the integration of the two exchanges would allow for dual listings and longer trading hours.

The two would also continue operating as independent markets, but will combine back office operations and share technology.

The deal will need the regulatory approval of the Dubai Financial Services Authority and the United Arab Emirate’s Securities and 
Commodities Authority.

While many believe that the UAE markets will fare better next year as the global economy recovers, the first quarter will continue to be volatile, as inverstors await the fourth quarter earnings and monitor the outcome of Dubai World’s debt saga.

“It is will be difficult to see a trend in the first quarter. Everyone wants to understand better the implications of the debt restructuring of Dubai World before they make key decisions,” said Samer Al Jaouni, general manager at Middle East Financial Brokerage.

rocel@khaleejtimes.com