Trade slowdown expected on heels of Ramadan

Shares of Etisalat have lost 3.3 per cent after regulators threatened to suspend BlackBerry services.

Brokers suffering from a lack of liquidity in regional stock markets expect no reprieve this week on the approach of the holy month of Ramadan, a period in which trading is traditionally subdued. Predictions offer little particular encouragement for the UAE markets, which are expected to remain hampered by lack of liquidity. With major earnings out of the way, UAE markets lack a local catalyst for trading. This is expected to keep institutional investors scarce as well.

"Mostly banks and property companies have declared earnings and there is not much to look forward to this week," said Ali Khan, the head of equities at the investment bank Arqaam Capital in Dubai. "Investors will mainly be focusing on preparations for the holy month, rather than trading activity," he said. But there is some relief on the horizon for Gulf investors: analysts expect market activity to get a boost before the Eid break which falls this year in the second week of September.

"We should see some activity picking up at the back end of Ramadan, when effects of larger global economic recovery and strong oil will start to make an impact on the regional markets," said Ingmar Burgardt, the managing director at the German private bank BHF in Abu Dhabi. "From our discussion with clients, we see an upside in the market and, despite low volumes, we may see the markets rising even during Ramadan," Mr Burgardt said.

Nour al Zoubi, the general manager at MAC Sharaf Securities in Dubai, is less enthusiastic about the prospects of a meaningful rally in coming weeks. "[The Gulf] markets move little with positive international movement but drop a lot on negative international news. We have seen this happening a number of times," he said. One area of interest in the region is telecommunications, especially Etisalat and du in the UAE, after several regulators threatened to suspend BlackBerry services because of security concerns.

Both operators have said they will offer alternative smartphone packages if the Telecommunications Regulatory Authority goes ahead with the threatened ban on BlackBerry services in October. They have assured investors any such ban would not affect profits this year, but Moody's Investor Service said revenue losses would occur in the last quarter that could not be quantified until March next year when the companies released earnings reports.

For du, analysts at Shuaa Capital recommends "accumulate" as the shares trade at less than five times the enterprise value or consensus earnings for 2012. By contrast, these analysts recommend "reduce exposure" for Zain, the Kuwaiti operator, saying details of the company's refinancing plans are yet to be revealed and a "quick fix" is not in sight. They describe Zain's valuation as "rich" at more than 13 times enterprise value.

Shares of Etisalat, which has the bulk of UAE BlackBerry subscribers, have lost 3.3 per cent to Dh10.05 since the controversy erupted near the end of last month, while du shares have remained flat, ending last week at Dh2.04. Being a large-cap stock, Etisalat influences the direction of the Abu Dhabi Securities Exchange General Index, which declined 0.6 per cent to 2,529.40 last week. The Dubai Financial Market (DFM) General Index gained 0.3 per cent to 1,517.78. The Kuwaiti index gained 0.1 per cent to close at 6,666.10 while Qatar's main measure continued its winning streak, adding 1.4 per cent for the week to close at 7,133.41. Muscat's index advanced 0.9 per cent to 6,256.99, while Bahrain's measure rose 0.5 per cent to 1,401.13.

Analysts at Shuaa Capital recommend that investors "reduce exposure" to the Saudi telecoms operator Zain, saying that details of the company's refinancing plans had yet to be revealed and that a "quick fix" was not in sight. The valuation is rich at more than 13 times the enterprise value (EV)/consensus earnings before interest, taxes, depreciation and amortization (EBITDA) 2012E. For du, Shuaa recommends "accumulate" as the shares trade at less than 5 times EV/EBITDA 2011E.

Shares of the Dubai bourse, traded under the stock symbol DFMC, are on the "sell" list of Shuaa Capital. DFM last month reported a second-quarter net profit of Dh27 million, a 79 per cent year-on-year drop that was 10 per cent short of Shuaa's estimate. The investment bank reiterates its "fair value" target of Dh1.20 per share. The DFM last week closed 1.3 per cent up at Dh1.48. The Saudi bourse, which trades from Saturday to Wednesday, last week gained 0.5 per cent to close at 6,300.44. With crude staying above $80 a barrel, Mr Burgardt was bullish on the Saudi market, especially major petrochemicals stocks, which have the potential to rise with the strong oil prices.

"We are fully invested with our funds allocation for Saudi Arabia as we see a huge potential there. We are less enthusiastic about investments in Kuwait, Oman and Bahrain markets," he said. The FTSE NASDAQ Dubai UAE 20 Index dropped 0.4 last week to 1,602, while ADIB Islamic Index on the MSCI UAE decreased by 0.2 per cent to 910. European and US markets ended Friday trade on a weak note as lower-than-expected growth in US company payrolls added to concerns that economic growth in the world's biggest oil-consuming country was slowing.

Even though economic data were weak, equity markets performed well, with the S&P 500 rising 6.9 per cent and the MSCI Emerging Markets Index rising 9.8 per cent for last month. In MENA markets, prices will move higher but at a much slower pace, and investors should be selective in taking risk, Gary Dugan, the chief investment officer of private banking at Emirates NBD, said in a note to investors yesterday.

Crude oil for September delivery fell $1.31 to settle at $80.70 a barrel on Friday on the New York Mercantile Exchange, the biggest decline since July 27. Futures rose 2.2 per cent last week. [e-mail]