In June, Mena markets with the exception of Oman declined across the board, Abu Dhabi fell 13.4 per cent, Dubai 22.5 per cent, Saudi Arabia 3.2 per cent, Qatar 16.1 per cent, Egypt 1.0 per cent and Kuwait 4.4 per cent; meanwhile Oman gained 2.2 per cent.
In our view after a sustained rally over the past 18 months a correction was due. One needs to place the correction in context and it should be remembered that the recent rally in the markets was supported by strong underlying fundamentals, positive sentiment over the MSCI inclusion and interest from foreign investors.
Catalysts for the recent correction were escalation of violence in Iraqi, margin calls and deleveraging, post-MSCI-upgrade profit-taking and concerns regarding Arabtec. Focus will be now on Q2 earnings and we don't expect any significant negative surprises. The higher oil price remains supportive for regional economies and the UAE historically benefits from a safe haven status in the event of rising regional tensions. The real estate and construction sector in the UAE had a difficult month, with the Dubai Financial Market real estate and construction index ending down by 30.5 per cent against the DFM General Index, which was down by 22.5 per cent. Despite the decrease in share price for UAE real estate companies, at the business level the Dubai real estate market there were new projects launched, notably from Emaar, Nakheel, and Damac and they have received overwhelmingly positive responses from customers. During Cityscape, there were also new project launches in Abu Dhabi, including a number by Aldar Properties. However, it should be noted that property prices in Dubai are leveling out because of higher mortgage caps and increased transfer fees imposed by governmental bodies.
Volatile market conditions are especially difficult to manage. An investment strategy should focus on fundamentally sound, liquid, blue-chip stocks with sustainable earnings growth and good capital appreciation potential, and in the medium term these stocks should outperform. It is important to remember that the underlying health of UAE and Mena markets is very robust and periods of high volatility provide tremendous opportunities to invest at attractive valuations.
Putting the UAE and the surrounding region economic performance in a global perspective further highlights underlying strengths. For example, the European Central Bank forecast for European recovery remains weak and further measures, including quantitative easing, could be used to stimulate European economies. Growth has been recovering in the United States, but the Federal Reserve has indicated that monetary policy changes will be subject not only to the unemployment level falling below 6.5 per cent but also improvement in inflation and other economic measures. In contrast, growth in the UAE and regional markets remains strong, driven by government spending on infrastructure, education, health care and tourism with a resultant boost in non-oil sector growth and greater diversification of local economies. Second quarter results of UAE and regional companies are expected to be positive, highlighting solid fundamentals that underpin the economy.
As for Oman, the region’s oneclimber last month, that market had decoupled from other GCC markets before the June correction; year to date the Muscat index has underperformed most GCC markets. Liquidity in the Omani market is a concern, resulting in positions that are likely to be traded infrequently by both institutional and retail investors.
In summary, the UAE market remains fundamentally strong and expectations are for volatility to normalise over the coming months. Improving profitability of corporates on the back of economic expansion, lower cost of borrowing, new IPOs such as the planned offering in Emaar’s malls unit, and a number of other factors are likely to support stock market performance over the near and medium term.
Saleem Khokhar is the head of equities at National Bank of Abu Dhabi
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