Investors prepared to tough it out

Traders settle in for a gloomy Christmas after the UAE fails to secure an upgrade by MSCI, but international investors sound an upbeat note about the prospects for the world economy.

Two shoppers look at the display window of a shoe store advertising big sales in Berlin, Germany. Sean Gallup / Getty Images

A wrenching week for stocks has left traders in the UAE gloomier than ever and wondering what else could go wrong.

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Failure to secure an upgrade to "emerging market" status from the index compiler MSCI sent stocks in Abu Dhabi to their lowest level since 2009.

And gains on world markets this month petered out last week as markets remained unconvinced by EU measures to halt the euro-zone debt crisis.

The Abu Dhabi Securities Exchange General Index slipped 0.5 per cent during the week to 2,458.91.

The Dubai Financial Market General Index shed 0.5 per cent in the same period to finish at 1,396.97, at one stage on Thursday coming within 10 points of its lowest level since 2004.

Despite the UAE's failed bid for an MSCI upgrade, traders should still have cause for optimism in the months ahead of MSCI's next review, which is in June, said Ali Khan, the head of Middle East and North Africa equity sales at Royal Bank of Scotland.

"The fact that no one seems to have given up should be encouraging," he said.

In the meantime, attention would return to the relative financial strengths of local companies, Mr Khan said, adding that pursuit of MSCI inclusion may have been a "distraction" for many investors.

"Where the UAE is concerned, it's maybe back to basics," he said.

MSCI on Thursday declined to upgrade the UAE and Qatar to "emerging market" status, retaining its ranking of both countries as "frontier markets".

An upgrade could have reaped hundreds of billions of dollars worth of capital inflows from international fund managers using the MSCI Emerging Markets Index as a benchmark.

MSCI's indexes are tracked by investors managing about US$3 trillion of funds.

Flaws in the UAE's delivery-versus-payment system, a mechanism which transfers payment at the same time as a stock is bought or sold, was pivotal, MSCI said.

After a sell-off on Thursday after MSCI's announcement, investors will have to search hard to find value among local equities, Mr Khan said.

"We may have bottomed out, but we still need to identify significant positive catalysts to attract liquidity back," he said.

Headwinds on world markets are expected to continue to subdue local market activity during the Christmas season, when volumes on western markets tend to be thin. A "Santa rally" on world markets tapered off last week after investors appeared to lose faith in the euro-zone's recovery plan.

The euro reached its lowest level against the dollar all year, before recovering 0.2 per cent yesterday to $1.3035. During the week, the euro dipped to below $1.30 for the first time since January.

The S&P 500 lost 2.8 per cent during the week to 1,219.66, while the FTSE Eurofirst 300 Index fell 2.9 per cent to 956.86.

The S&P AFE 40 Index of large-cap Middle Eastern stocks fell 1 per cent to 53.82.

Crude oil fell sharply during the week after Opec raised production quotas, with Brent crude futures falling $4.67 to $104.06 per barrel during the week. But investment banks sounded a note of optimism on the improving prospects for the global economy as the year comes to a close.

Stocks and commodities may rally during the second half of the year as investors start to anticipate growth for 2013 and 2014, said Jack Malvey, the chief global market strategist for BNY Mellon Asset Management. "Investors are focusing more on what can go wrong instead of the potential upside," he said. "The last few years have been rough on equities. Folks are doing a lot of rear-view mirror gazing, looking to make same trades as in 2011, which may not be a good idea."

The worries surrounding the euro-zone sovereign debt crisis will persist in the first few weeks of the new year but should subside, Jim O'Neill, the chairman of Goldman Sachs Asset Management, wrote in a note to clients.

"Europe will still be called Europe, and with a bit of luck, it might go back to being as dull as it usually is," he said.

However, concern was still warranted around the plunging value of the euro, which could fall as low as $1.10 against the dollar, Mr O'Neill added.

The Saudi Tadawul All-Share Index, the only Gulf bourse trading yesterday, rose 0.2 per cent to 6,253.66.

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