Ghost of 2008 rattles its chains in Dubai

So far this year, the Dubai Financial Market General Index has risen 25.6 per cent. The increase is welcome but raises questions.

The sudden upward march of the DFM raises questions. AP Photo

So far this year, the Dubai Financial Market (DFM) General Index has risen 25.6 per cent. The increase is welcome - the index finished last year about 500 points and 17.3 per cent lower than at the close of 2010.

But like the sudden receipt of gifts from a previously inattentive spouse, the sudden upward march of the DFM raises questions.

Is the new rise of the Dubai bourse sustainable? Peter Gotke, the vice president and head of depositary receipts for the GCC at BNY Mellon, said that if risk appetite were higher today and hedge funds were part of the inflow, even gentle pressure could spur money to leave the emirate again tomorrow.

"Certainly, our perspective through managing depositary receipt programmes across the region shows emerging markets to be selectively popular," he said.

Now sceptics are asking whether it is that the type of investor driving the resurgence is just a momentum player or that a more diversified range of investoris operating in the emirate and stabilising the market.

Mr Gotke predicts that companies will take more control in identifying the type of investor they want on their registers, which suggests the latter scenario.

Poolside at the Shangri-La hotel in Abu Dhabi, the consensus among a group of young Emiratis - a trader, a consultant and a government industrialist - was that after four years in the doldrums, Dubai's time had come again. They were confident the current bull run represented an overdue return of confidence to an opportunity-rich market that had been undervalued for too long.

Tarek Shahin, a portfolio manager at Investec Asset Management, agreed. "The DFM had been overlooked for too long since the events of 2008/9," he said.

Investors must research potential investments carefully, however.

"A selective approach remains prudent, with selected names continuing to look attractive, while others show signs of being overbought, at least in the short term," Mr Shahin said.

Separating short and long-term prospects is key. In the short term, says Peter Garnry, an equity strategist at Saxo Bank, the rally at the start of this year would have an effect. "UAE stocks are due for a consolidation due to the strong rally in the first two months."

That means a period of increased market volatility is on the immediate horizon. For the longer term, Mr Garnry is more bullish. It is an attitude not borne out by investors.

The DFM General Index was trading at a dividend yield - or risk premium - of 2.8 per cent on Thursday. At the same time, shares were trading below their book value, with the index trading at a price-to-book ratio of about 0.99. This indicates investors assign no value to future growth opportunities.

Mr Garnry believes such dovishness is misplaced.

"We believe this represents a too-large risk premium, despite the political and energy price risks, and as such the DFM [General Index] should structurally trade at higher valuation," he said.

Investors may have good reason to be cautious, however. The recent rise of the Dubai index has occurred against a backdrop of aggressive performance in international and commodity markets, which some analysts at the Global Financial Market Forum in Abu Dhabi last week said could be outpacing the economic reality.

Figures due out this week will help to clarify the economic picture. Tomorrow the US is due to release the Institute of Supply Chain Management Services Index report, which attempts to gauge how the service sector of the US economy is doing. It is one to watch.

Arabtec figures for the fourth quarter of last year are also expected in the coming days. Arabtec shares are up 120 per cent for the year to date, beating the index by close to 100 per cent, a fact for which the company's directors have been consistently reluctant to provide a public explanation to shareholders. Investors will be looking for answers in the statement.

Saudi Arabia, which is pumping oil at near record levels, will post its official differentials by tomorrow, setting the tone for fellow Middle Eastern exporters Iraq, Iran and Kuwait. On Wednesday delayed bidding begins on 12 Iraqi oil exploration blocks.

Brent crude is up more than 20 per cent this year. It may rise to US$150 a barrel in the next nine months - above its $147 previous record high - if diplomatic relations between Iran and the West worsen, Barclays says.

Such a jump would create gains for oil producers such as the UAE. But the IMF has warned that high oil prices could seriously slow global growth, which would cause industrial giants such as China, already dogged by fears of a hard landing, to curb their demand. Oil exporters would be hit if this happened.

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