Stock markets in the Emirates could gain 25 per cent this year, helped by attractive valuations and faster earnings growth, a report from the UAE's biggest investment bank says. A successful resolution to Dubai World's planned debt restructuring would also benefit local markets, Shuaa Capital said yesterday.
The bank said investors might have given too much weight to negative news related to the Dubai Government-owned conglomerate. "The main catalyst for this growth will be Dubai World. It will not be as hostile a solution as the market is pricing in," said Mahdi Mattar, the chief economist at Shuaa Capital. While global stock markets rebounded last year from the sharp corrections seen at the height of the global financial crisis, regional bourses were slower to emerge from the trough.
The MSCI World Index gained about 28 per cent last year, but among the six Gulf states, only Saudi Arabia's Tadawul All Share Index achieved similar growth. The Abu Dhabi Securities Exchange General Index was the UAE's best-performing bourse with stocks gaining about 15 per cent, while the Dubai Financial Market General Index advanced 10 per cent for the year. Morgan Stanley expects any recovery in local stock exchanges to emerge well into the second half of the year.
Stocks should feel strong headwinds during the first half of the year, as funding costs rise after the debt disclosures at Dubai World, said Michael Wang, an emerging-markets strategist at the bank. Later in the year, the bank expects the Arabian markets, which include all Gulf countries as well as Egypt, Lebanon, Morocco and Tunisia, to outperform their emerging-market counterparts. "It will be a tough road back for the Arabian markets, but given where the oil markets are, they could outperform emerging markets in the second half of the year," Mr Wang said.
Attractive UAE stock valuations should also induce investors to buy, he said. While markets are expected to rebound this year, forecasts of economic growth have been trimmed since Dubai World announced in November that it was seeking a debt repayment standstill. The IMF cut its UAE growth forecast from 3 per cent in an October report - issued before Dubai World's announcement - to 2.4 per cent. HSBC Middle East lowered its forecast for this year to 2 per cent from an initial 4.1 per cent, while Barclays Capital said the economy was now more likely to grow by 2.1 per cent rather than its previous prediction of 3.6 per cent.
Standard Chartered Bank expects the economy to expand by 3 per cent, but it would have predicted growth as high as 4.5 per cent had it not been for the Dubai World debt crisis. Emirates NBD, the largest UAE bank by assets, has stuck by its original estimate, forecasting growth of 2.5 per cent. That would still be ahead of many developed nations such as the US, where the IMF is predicting economic expansion of 1.5 per cent this year. The IMF is even less positive about the UK and Germany, where it sees expansion of just 0.9 and 0.3 per cent, respectively.
Tim Fox, the chief economist at Emirates NBD, said it was important not to overstate the significance of the financial troubles of Dubai World to the overall economic outlook. "We are positive for the UAE for the year as a whole," Mr Fox said. "Despite the events of the past two months, it's important not to get swept up by the emotion and focus on the reality. There will always be issues that make 2010 challenging, but the ways things are changing globally will make for favourable conditions."
One reason to be positive is oil. A collapse in demand as the global financial crisis took hold dramatically eroded the price of the commodity and led governments to scale back oil production. But with the price now relatively stable at close to US$80 per barrel, government-owned oil companies are starting to increase production and exports are expected to increase. "When it comes to real GDP growth, what's more important is oil production as we are unlikely to see a repeat of the hydrocarbon cuts in 2010," said Marios Maratheftis, the regional head of research at Standard Chartered. "An increase in oil prices should be positive for growth and will mean budget deficits are unlikely."