UAE shares fall amid deepening emerging markets sell-off

The benchmark Dubai Financial General Market Index closed 3.2 per cent lower on Thursday. Reem Mohammed / The National

UAE stocks fell, erasing gains made over the year, as oil extended its drop to six-year lows amid concerns that the global economy will grow at a slower pace.

The absence of demand for commodities from China, where the stock market is imploding, speculation that the US Federal Reserve will soon raise interest rates and a wide collapse in emerging market currencies is sparking a financial crisis that has the potential to deepen, investors said.

“It’s a perfect storm in the sense that no one in a fiat economy with a [US] dollar based credit system benefits from a stronger dollar,” said Steen Jakobsen, the chief investment officer of Saxo Bank, the Danish investment bank.

“That increases the burden of debt and it takes away from the growth potential of the emerging markets, which still make up more than 50 per cent of world growth.”

The drop in Dubai and Abu Dhabi stocks comes as investors sold equities across the world yesterday, but especially in emerging markets. China’s main stock index dropped 3.4 per cent while oil traded in New York fell as much as 1.5 per cent.

Kazakhstan made the surprise move of floating its currency, sparking a drop of more than 20 per cent against the dollar.

The benchmark Dubai Financial Market General Index closed 3.2 per cent lower, dragged down by Emaar Properties, the biggest publicly traded real estate developer in the UAE.

The drop wiped out the index’s year-to-date gain, putting it 1.7 per cent lower than its 2015 starting point.

Meanwhile in Abu Dhabi, the emirate's key stocks gauge shed 1.4 per cent, led by a drop in FGB, the biggest publicly traded bank in Abu Dhabi. Year-to-date, the measure is down 0.4 per cent.

“I think we are in the midst of a financial crisis because the reason commodity prices are down is not illogical,” said Gary Dugan, National Bank of Abu Dhabi’s global wealth chief investment officer and head of investment strategy.

“There’s little global growth around, very few countries with any positive momentum. Normally you cut interest rates or you see a big fiscal boost, and I can’t see any country around the world providing that.”

Emerging market equities have been among the most unloved assets in recent years as weakening demand for commodities globally has taken a toll on many of these nations that rely on exports such as oil, gas, wheat and sugar to bolster economic growth.

Because overall global growth has been lacklustre, price inflation has slowed and commodity prices have been declining or treading water.

Oil has been declining in part because of weakening demand from China as factories reduce output amid softening demand for the country's exports.

While the UAE is more economically diversified than many of its Arabian Gulf neighbours, the Federal Government still relies on revenues from the sale of oil to fund more than 60 per cent of its budget.

Crude has shed more than 50 per cent of its value in the past 12 months. Production in countries including the United States has risen, while demand has waned amid economic uncertainty.

“When it comes to the region, we are highly correlated with oil,” said Nadi Barghouti, the head of asset management at Emirates Investment Bank, a private bank in Dubai.

“Supply is actually growing, we’re seeing higher inventories and we are seeing lower demand from oil importing countries. Before the issue was on the supply, and now we are actually seeing it from both ends, higher supply, lower demand.”

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