Stock traders in the UAE are holding their collective breath in anticipation of the third-quarter reporting season, which is likely to make or break a rally that began last month.
Dubai and Abu Dhabi stock markets outperformed the rest of the region last month, rising by 15 per cent and 8 per cent respectively. "We maintain a very net-positive scenario for the market, at least for the remaining quarter," said Saad al Chalabi, an institutional trader at AlRamz Securities, based in Abu Dhabi. "There is still some concern on the third-quarter earnings expected, but nothing significant."
So far, fund managers remain satisfied with the stream of positive news concerning UAE stock markets and expect the third quarter to trigger the next wave of buying. This week, Drake & Scull, an engineering contractor based in Dubai, is expected to provide further details on a Saudi acquisition. Shares of the company reached a five-month high of 98 fils last week after the firm said it had signed a letter of intent for the acquisition of a Saudi mechanical electrical and plumbing company.
One focus of attention will be the level of write-downs on Emaar Properties's investment in Amlak, an Islamic mortgage financing company, and how it will affect earnings for the developer. Investors will also be looking at banks' provisions after Dubai World's agreement to restructure US$24.9 billion of its debt with 99 per cent of its creditor banks. "In the UAE, provisioning levels will be followed more closely than the reported income and we expect some positive surprises on liquidity that could become positive catalysts for the stocks," said Mohammed Hawa, an analyst at Credit Suisse in London.
Last week, Dubai credit default swaps (CDS), or the cost of insurance of Dubai debt, fell to its lowest level in almost a year, breaking the 400 mark, a move that put the icing on the cake for those who trade in equities. "The CDS levels usually reflect the sovereign risk premium that is implied into any equity valuation by analysts," said Fadi al Said, the senior investment manager and head of MENA equities at ING Investment Management. When risk premium goes down, the discount rate goes down and the equity value goes up.
CDS levels breaking the 400 mark was in effect an affirmation for brokers that confidence is back after clients showed appetite for several Dubai stocks that have not been trading for some time. Market confidence has returned on the back of the announcement of the launch of the first debt issue by the Dubai Government since the global credit crisis, Dubai World's restructuring proposal, a convertible bond by Emaar Properties, and further clarity on Tamweel, a mortgage financing company whose shares have been suspended since 2008.
In addition, oil above $80 a barrel has also helped support the market. Two stocks on the Dubai Financial Market have reached their maximum foreign ownership limits, Aramex, the Middle East's biggest courier company, and Arabtec Holding, a Dubai engineering contractor. "This is encouraging," Mr al Said said. "People are betting maybe at least the worst is over."
