Let’s get the positive aspects of the crash in the Dubai Financial Market out of the way first. It will not take long.
One is that at least the DFM General Index, which has been savaged by selling for the past month and moved into “panic” mode over the past week, is behaving like a normal stock market. The value of shares can go down as well as up, as London, New York, Tokyo and Hong Kong (all much longer established markets) will confirm, so the DFM is only playing by global investment rules.
And, putting a brave face on it, perhaps it’s better to get the “correction” out of the way in a short, sharp shock this year, come back after the festive season and start again in January, when oil prices begin their traditional annual rise in response to increased demand during the northern winter.
But that’s about it, and small consolation it is too. By any standards, the sudden fall in Dubai share prices has been a disaster for the emirate’s status as the leading financial centre of the Arabian Gulf. The big gains of 2014 have been wiped out, as the DFM has moved from the best performing market in the world to one of the worst in little over a month.
It was not meant to be like this when the UAE joined the MSCI Emerging Markets Index in the summer. Then, the argument was that solid international institutions would bring a new stability to the market and prevent the wild gyrations of the past. That hope has vanished in a frenzy of selling as speculators once again call the shots on the DFM.
All the more serious for the DFM is that other Gulf centres, all of them more exposed to falls in the oil price, have been nowhere near as badly hit. Saudi Arabia’s Tadawul, obviously more vulnerable to crude falls, has dropped, of course, but has not experienced the steep falls of Dubai, which has only marginal oil revenue.
Nor is it the whole of Dubai that has crashed. Nasdaq Dubai, the smaller international market, has kept declines to single digits.
So is there something peculiar about DFM that causes such wild gyrations? There is indeed, and it is partly a result of the market’s own success.
First, reflecting Dubai’s status as the main and most open regional financial centre, it has attracted big funds from investors in other GCC states, and these have been withdrawn as oil fears have grown at home.
Second, again a symptom of success, it has led the way in the IPO surge in the region. Saudi has had bigger market flotations, but Dubai has had more, and more entrepreneurial IPOs too. Marka, Emaar Malls, Amanat and Dubai Parks have all enlivened the DFM in recent months, and that is a good thing. The measure of a healthy capital market lies partly in the enthusiasm with which investors climb aboard.
Critics have pointed to the “greenfield” IPOs as a drag on the DFM, and it is true that we have probably seen enough of these for the time being. But there is no rhyme or reason to the pattern: Emaar Malls, a mature business with a solid track record, has suffered alongside Dubai Parks, with assets in the form of land and contracts, as well as obvious “greenfields” such as Marka and Amanat.
These IPOs have sucked liquidity out of the DFM at the worst possible time. But it would be crazy to ban IPOs, or types of IPO, in reaction to the crash. The markets will probably regulate themselves quite efficiently in this respect.
Finally, and perhaps most worryingly, is the fact that retail investors, who are a big force in determining DFM market sentiment, show no sign of having learnt from previous downturns. They still expect Day One profits in IPOs, they still borrow from banks to buy highly leveraged shares, and they are still prone to sell at the first sign of weakness.
Common sense suggests regulations on bank lending to fund equity purchases should be further tightened.
These defects in the DFM are quite easily fixable. But the real challenge is to persuade UAE and other GCC investors that the DFM is a proper capital-raising marketplace, and not a quick-churn casino.
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