UAE markets’ wild ride not over until oil finds its feet

After Dubai's stock index rallied by a record 13 per cent, fund managers say more volatility is probably in store.

Investors cheered by the sharp rebound of UAE stocks on Thursday should brace themselves for more ups and downs until the bottom for the oil market becomes clearer, fund managers said.

“One thing I am sure of for next week is that the volatility will be there,” said Sebastien Henin, the head of asset management at the Abu Dhabi-based investment firm The National Investor.

“In the past week we have had some factors that have affected this volatility, like margin calls, which won’t be here next week,” he added. “I think the volatility will go down, but it might take a couple of weeks for things to stabilise. Markets should go up and down until a floor for oil is found. The market will trade both ways.”

Dubai's main benchmark index rallied 13 per cent on Thursday, its biggest jump to date, while Abu Dhabi's main equities gauge, the ADX General Index increased by 6.7 per cent, its biggest gain since 2009. The DFM General Index had shed 14 per cent since the beginning of the week before Thursday's rebound, and more than Dh60 billion was wiped off the market value of the country's equities in the same period. That drop came as Brent crude extended losses to levels not reached since 2009 as the cost of a barrel declined below $60.

The UAE is the world's eighth-biggest oil producer and the Federal Government funds more than 60 per cent of its budget from crude exports. The drop in oil, which has shed 45 per cent of its value this year, comes amid increasing production in countries such as the United States and waning demand amid global economic uncertainty.

The Energy Minister, Suhail Al Mazrouei, said on Tuesday that the country could cope with the drop in oil prices, and that the large fiscal reserves that the UAE has built up would allow it to keep spending on development projects in coming years.

“Thankfully the environment is very different from 2008,” said Mr Henin. “There is consensus in the market that the governments will not reduce spending. We had some calls with some prospective clients in Europe. They are contemplating the idea of allocating money to the region. Before, even if our prospects were very positive in terms of visibility and fundamentals of the region, they were not comfortable with one point, which was valuations.”

After the recent drop, the price-to-earnings ratio, a measure of gauging the cheapness of stocks, has dropped in line with other emerging markets. The Standard & Poor's/IFC Global United Arab Emirates Price Index, a measure of equities in Dubai and Abu Dhabi, now trades at a forward multiple of 10.1 times earnings compared to 10.6 for the MSCI Emerging Markets Index. The MSCI AWCI Index, which tracks stocks in the developed world and emerging markets, trades at a multiple of 14.3 times earnings.

Still, despite the attractive valuations, other global factors, such as Russia’s economic meltdown, might affect the direction of UAE stocks this week, even after the US Federal Reserve said it was not in a rush to raise short-term interest rates. Low interest rates on the dollar typically give investors more appetite for investing in riskier emerging-market assets.

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