Possible market upgrade gives hope to UAE investors

Improving company earnings and the possibility of the UAE gaining emerging market status may offer Gulf stocks a respite from further global financial market volatility
Gulf shares lost as much as US$30 billion (Dh110.1bn) last month as the aftershocks from the meltdown in global markets rippled through the region. Photographer: Phil Weymouth/Bloomberg
Gulf shares lost as much as US$30 billion (Dh110.1bn) last month as the aftershocks from the meltdown in global markets rippled through the region. Photographer: Phil Weymouth/Bloomberg

Gulf shares lost as much as US$30 billion (Dh110.1bn) last month as the aftershocks from the meltdown in global markets rippled through the region.

About $4.8 trillion was trimmed from global markets with slowing economic growth in the US and the debt crisis in Europe sparking the biggest sell-off since the global financial turmoil of 2008.

Now investors are nervously bracing themselves for more volatility in the remainder of the year.

"Overall, all the regional markets will be quite obedient in tracking global markets, and if there's big swings globally they're likely to be matched here," says Julian Bruce, the director of equity sales at EFG-Hermes in Dubai.

But improving local company earnings and the possibility of the index provider MSCI granting the UAE and Qatar emerging market status may give the bourses a much-needed boost in the final third of the year.

Last month, all regional markets ended lower, with heavier selling tilted towards the beginning of the month after Standard & Poor's lowered its top-tier sovereign debt rating on the US and the euro-zone debt crisis spotlight fell again on Greece, Italy and Spain.

Leading the declines were Saudi Arabia's Tadawul All-Share Index, which retreated 6.46 per cent, with the Kuwait Stock Exchange Price Index slipping 3.97 per cent. The Dubai Financial Market General Index edged 1.66 per cent lower and the Abu Dhabi Stock Exchange General Index lost 0.14 per cent.

"Performance of UAE stocks was better than its regional peers as buying activity from local and GCC investors made up for the selling pressure imposed by foreign investors," Global Investment House, based in Kuwait, pointed out in a report last week.

Overall, the market capitalisation of GCC shares dropped by $30.7bn last month to $675.7bn, according to Global Investment House.

The downturn came as many bourses were only recently picking up after the Arab Spring scared off foreign investors earlier in the year.

Another concern for Gulf markets has been thin trading volumes.

Last week, hopes of a post-Ramadan rebound in liquidity evaporated as more gloomy signs about the global outlook emerged.

"People are focused on global events and are sitting on the sidelines and seeing if there will be a repeat of 2008 or whether the global economy will improve," says Haissam Arabi, the chief executive of Gulfmena Alternative Investments.

But regional markets are likely to receive a lift through an anticipated improvement in corporate earnings.

Banks, the heavyweights of the market, are tipped to make more progress after being hit by the global financial crisis. Lenders here have already shown themselves to be more resilient than their struggling peers in Europe.

Other corporate earnings should also show signs of improvement.

But analysts warn that even positive data will take a back seat if clouds start to gather over the global economy and growth continues to stall in the US. Concerns over the euro-zone debt crisis will also hit markets if EU leaders fail to come up with a credible rescue plan.

"It's possible there will be a continued improvement in numbers for the third and fourth quarter, but positive data is likely to be overshadowed by any doom and gloom from global markets," Mr Bruce says.

That will mean the close correlation between local and global markets will continue, according to analysts.

Naturally, investors will be closely watching big global events. Chief among them will be a meeting of the Federal Reserve this month, with interest surrounding whether the US central bank will embark on a new asset-buying programme designed to boost the economy.

The previous $600bn stimulus scheme expired in June.

Barack Obama, the US president, will also be under scrutiny as he seeks political consensus on a $447bn plan to create jobs. Any repeat of the political wrangling with Congress in July over raising the country's budget deficit will breed anxiety across markets.

The sovereign debt problems plaguing the euro zone will be another concern for investors. Any sign of the crisis deepening or submerging more countries will transmit into negative sentiment on international markets. In contrast, any indication that EU politicians are finally getting to grips with the crisis will boost bourses worldwide.

"The sovereign debt crisis in the euro area could intensify again," the Organisation for Economic Co-operation and Development warned last week as it downgraded GDP forecasts in Europe and the US.

Later in the year, focus will return to regional players as a decision looms in December on whether MSCI will upgrade the status of the UAE and Qatar to emerging markets. Both are currently categorised as frontier markets.

In June it extended the review period for the potential reclassification to further assess the suitability of each market.

An upgrade could attract new liquidity to the UAE's bourses and drive index fund investment, which has declined in recent years.

"For the UAE, there's a 50-50 chance," Mr Arabi says. "From a structural point of view we are ready, but if the decision comes down to foreign investment limits I don't see that changing."

 

tarnold@thenational.ae

Published: September 12, 2011 04:00 AM

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