Analysts puzzled as Gulf markets tank

The swooning of regional markets has been blamed on everything from corruption to overheated stocks.

Power sliding: watchers are worried about the current downswing at markets such as Abu Dhabi Securities Exchange but many also see the current situation as a chance to buy stocks at lower prices.

Experts have pinned the blame for the UAE's recent stockmarket swoon on any number of economic forces. Selling by foreign investors, a strengthening US dollar, a corruption clampdown in Dubai and Saudi Arabia's decision to allow indirect foreign investment in its stock market have all been cast at one time or another as culprits. Financial and property stocks - two sectors that include the lion's share of listed businesses in the UAE - have been especially hard hit, and they, too, have been fingered as scapegoats.
Yet despite the logic put forth by analysts and brokers as the market turned sour, many observers remain unconvinced that the cocktail of troubling factors that have been advanced can account fully for the market's slide. Take a company like Aldar, the developer based in Abu Dhabi, which has lost 28 per cent of its stock value since the middle of June. Or the Dubai developer Union Properties, which has seen its stock dive 31 per cent since July. As its stock was sinking, Aldar announced an increase in profits of 186.8 per cent for the first half of this year. UP's second quarter net profits jumped 106 per cent.
That seeming contradiction between the fundamental strength of companies and the downwards arc of their stock prices has left many market observers scratching their heads. And the mixed-up scenario has played out across stocks listed on the UAE's two main exchanges - the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM). The ADX General Index fell roughly 15 per cent this summer, and the DFM General Index shed more than 20 per cent even amid a streak of positive financial news. The declines have made many once popular stocks cheap, driving their price-to-earnings ratios into the single digits.
The gloom, in spite of fundamental strength, worries many market watchers. And there is no consensus on exactly when fundamentals will begin to hold sway over fickle sentiment. The problem now, according to Ali Khan of Arqaam Capital in Dubai, is that the community of investors is fractured into camps with vastly divergent takes on the market. "There is definitely a polarised view of the market," Mr Khan said. "Quite a few international investors are not convinced of potential fundamentals going forward. There are other international investors who are cautious, yet willing to accumulate on weakness. And then I have local investors who are very interested at current prices. It's a real divergence of opinion, and it's very strong."
Even technical traders who watch for complex patterns to predict the future direction of stock prices are having a difficult time making sense of the recent declines. Like many other market watchers, they see a strong long-term picture with wild short-term fluctuations that they admit have been difficult to explain. Nabil Effat and Adel Merheb, two technical analysts at Shuaa Capital in Dubai, said the DFM's next technical "support level", or the level deemed by technical analysts to be the lowest boundary that the market can reach before it either bounces sharply or falls flat, was 4,500 points. The DFM General Index currently stands at roughly 4,800 points.
"If it turns below 4,500, we would have to reassess the situation," Mr Merheb said. "The long-term picture is still intact, but sometimes the media tends to amplify the problems. A lot of people are reading in the news that it is a bear market, but we think the long-term outlook is still good." Underlying many of the reasons put forth for the recent market correction are the activities and positions of foreign investors.
While the local markets have always been volatile because they are dominated by individual investors who make frequent moves in and out of equities, an influx in recent years of large foreign pools of money has slightly altered the rules of the game. The economic forces that drive international investors in and out of markets often have little to do with regional business dynamics and a lot to do with global investing trends. This has helped link up local markets with global ones. It has also put UAE markets at the mercy of factors largely beyond the control of domestic companies, leading in part to the curious disconnect between the rosy fundamentals and poor performances of the markets.
At present, foreigners have a number of reasons to move out of UAE markets. First, talk of removing the dirham's peg to the dollar has abated, eliminating speculative moves into assets denominated in dirhams based in the UAE. Second, hedge funds from the West are finding it harder to maintain their leveraged investing because of the global credit crunch, and are selling off some of their stakes, including in the GCC. Third, many foreigners invested in the UAE to capitalise on high oil prices, but oil has declined recently. Finally, emerging market stocks across the globe have sagged in recent months, leading to a flight to safer assets.
"There is a basket of reasons behind the recent change in sentiment," said Roy Cherry, an analyst at Shuaa Capital in Dubai. "But fundamentally we remain the most attractive region in the world." Even if some of the concerns are substantiated, if you ask Mr Cherry - and plenty of other market participants in the UAE - the downwards trend spells a buying opportunity. The decline has unquestionably made stocks cheap, pushing price-to-earnings ratios far below levels typically seen in developing markets. Ratios of seven or eight times projected earnings for this year are common on the ADX and DFM.
Many experts see this as surprising in a developing market where ratios above 20 times earnings might be more in line with expectations. Although they concede that there is reason to doubt that the country's fast development and economic liberalisation will continue unobstructed, they also say the 20 and 30 per cent declines in many share prices do not seem to be justified. "I think many companies in UAE have very strong stories, with some of the best, like Arabtec and Aldar, trading at bargain levels," Mr Cherry said. "Some of the real estate and construction companies are trading at seven or eight times 2008 earnings, which is ridiculous in a growth market."
Whether those "bargains" turn into gems or go bust remains to be seen, of course. The regional stock market crash of 2006 proved that even with high oil revenues and foreign investors clamouring for bigger stakes in the Middle East, stock investing remains a risky proposition in these developing markets. In all likelihood, experts say, that will remain the case as long as prices are driven by retail investor sentiment, instead of fundamentals.
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