Stock brokers as late as November had been expecting 2015 to be a good year.
That outlook has been tempered, however, as traders head into the new year with the uncertainty over oil potentially affecting regional state budgets.
That combined with the possibility of US Federal Reserve hiking rates this year is spurring many brokers to approach the coming few months with caution.
By December, many had adapted their positions from earlier, saying they would start readjusting their budgets for the coming year with the expectation of slower trading activity.
“As investors what we will be looking for is three major things,” said Tariq Qaqish, the head of asset management at Al Mal Capital in Dubai.
“Firstly, the UAE budget for [this] year and regional budgets as some of the UAE companies have businesses in the region.
“Secondly, the outlook for oil prices: whether they stay at these levels or if they drop, compelling a different scenario entirely,” Mr Qaqish said.
“Third, US Federal Reserve plans to raise interest rates, as they will have a marked effect on the global economy.”
For Dubai stocks, 2014 was a tug of war between bulls and bears.
Coming off a 117 per cent return the year before, euphoria and hype exaggerated stock valuations.
Market catalysts, such as the Expo 2020 win and MSCI's upgrade of the UAE to an emerging market, drove retail investors to lengthen their holding period of local stocks.
But by the second half of the year, the fundamentals dramatically changed and the market was defined by excessive volatility.
“As a fund manager, I would view this year as one of my toughest in terms of allocating investments into different asset classes,” said Marwan Shurrab of the Dubai-based Vision Investments & Holdings.
“Why? Because of how cyclical it was, the sentiment changed from one phase to another and it was all linked to non-related investment decision aspects.”
The Dubai Financial Market General Index jumped 59.4 per cent from January to May after the market began to price in the second wave of Dubai’s construction boom as a result of the Expo win.
New hotels and infrastructure projects were being announced, encouraging investors to look at companies that would benefit from the latest frenzy.
In the same five-month span, Abu Dhabi’s index, which is rather less volatile, rose 22 per cent.
“As a manager, you value the investment based on the company’s potential for growth, whether its under valued or over valued, how they are expected to benefit from a global economic recovery,” Mr Shurrab said.
“The GCC market is very much dominated by retail investors, but with those catalysts, the retail came to behave like an institution holding shares for a longer period of time until those catalysts were realised. We knew that in the beginning of 2014 the market was overstretched,” Mr Shurrab said.
By February, the world’s biggest asset manager BlackRock sounded the alarm amid concerns that Dubai stocks were overvalued.
The company’s US$297 million fund had “substantially” reduced its holdings in UAE shares the month before, its managers said.
Yet foreign buying into local stocks accelerated ahead of June, when shares were removed from MSCI’s frontier markets index and incorporated into the emerging markets index, and boosted the market further.
The capital markets industry was finally getting reprieve after years of low volume, consolidation and layoffs. Brokerage companies finally turned the corner and statements showed they were getting quarter after quarter of profitability after years of losses and closures.
But as sentiment continued to charge ahead, worries also began to surface about how much leverage there was in the system; how much of the trading was actual cash versus paper.
Arabtec, an actively traded construction company, plummeted after chief executive Hasan Ismaik resigned and hundreds of people were made redundant, provoking investor panic over the company's prospects.
Arabtec fell 61 per cent in June while Dubai's index lost 23.4 per cent. Abu Dhabi's index, still less volatile, fell about 13 per cent for the month. The federal market regulator, the Securities and Commodities Authority, at first said it believed stock brokerages were providing excessive leverage to customers who leapt into Arabtec stock. After the books appeared clean, the regulator turned its attention to the banks.
Mr Ismaik on at least two occasions had made public statements on how much he thought Arabtec shares were worth. Prices reacted. He had also been building his stake from 8 per cent all the way up to 28.8 per cent, in what, when it was eventually disclosed, was described as a vote of confidence that would reduce volatility in the share price. On July 7, the regulator said it would monitor statements of chief executives and analysts and their impact on the share price.
But for many regional investors, the delay had chipped confidence.
“I have Saudi clients, who pulled out completely after what happened with Arabtec,” said a trader who spoke on condition of anonymity. “They weren’t happy with the story and how the regulator performed during that period,” the trader said.
The leverage in the system coupled with Arabtec’s dramatic decline wiped out the wealth of many equity investors. Local retail traders came to encourage volatility in the market to make short-term gains and recoup their losses.
“What happened after June, was the market turned from value-driven into a trader market. Retail investors tried to benefit from the volatility to make more money,” Mr Shurrab said.
Last year also witnessed a flurry of initial public offerings. The result confirmed a strong come back for leverage and the results have been mixed for the market.
Marka, a greenfield retail focused company, was the first, followed by Emaar Malls, Amanat and Dubai Parks and Resorts.
“I think the new entries were good overall but it did drawdown some liquidity from the market, but medium to long term having greater depth of equities is an overriding factor,” said Saleem Khokhar, head of equities at NBAD.
“The leverage element was quite high with those IPOs. When it came to Emaar Malls Group, a five to one ratio was being offered,” Mr Khokhar said.
Emaar's IPO of the owner of The Dubai Mall was massively oversubscribed, attracting $80 billion from retail, regional and foreign institutional investors. About Dh9bn was given to the shareholders of the parent company as dividends, some went towards EMG and what was left was redistributed back to investors.
The removal of liquidity from the market and their deployment into the IPOs helped strengthen volatility in the market, Mr Shurrab said.
Emaar’s IPO did take a lot of liquidity from the market, after a period of generally slow activity over the summer and Ramadan.
halsayegh@thenational.ae
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