What does 2009 have in store for investors in equity markets?

The Dubai Financial Market lost 70 per cent of its value last year, making it the worst performer in the region.

The stock markets of Abu Dhabi and Dubai could get worse before they get better. While traders and analysts agree the markets will gain ground this year, they may first face further falls. And they are unlikely to recover all of the hefty losses of last year. Issues both dominating and clouding the markets include the question of GDP growth and the decline and possible recovery of oil prices, the availability of money for retail and institutional investors, whether there will be an easing in interbank lending, a jump start for the country's housing finance market and whether governments can restore some confidence, possibly by means of an equity-focused fund to pump money in the markets. How policymakers tackle the issues and how markets in Europe and Asia will behave also is going to influence the course of local ­indexes. What market players would not want to see is a repeat performance of last year, where the Dubai Financial Market turned out be the worst-performing stock exchange in the Gulf region, dropping more than 70 per cent of its index value. Abu Dhabi did a little better but still managed to lose nearly 50 per cent of the value of the index last year. The raging debate is whether the markets have found a bottom. Could they fall further before retail investors see some of their losses recovered? Finding a common answer is difficult but optimists are pinning their hopes on fourth-quarter earnings. "We don't know if the markets have bottomed out yet. It will be determined by the 2008 earnings of listed firms," says Shehab ­Gargash, the chief executive of Daman ­Investments. He says there is a "systemic rather than a markets issue" that needs to be resolved. "The worst may not come now, but there are a lot of issues that need tackling before we can work to build investors confidence and bring liquidity back to the floor." The markets' performance in the last quarter, and especially last month, was dismal, with a majority of the stocks losing ground. Property and banking shares took the hardest blow on the Abu Dhabi and Dubai bourses, according to the investment bank Rasmala, based in Dubai. On the Abu Dhabi Securities Exchange, leading stocks such as National Bank of Abu Dhabi, Etisalat and Al Dar lost between 15 per cent and 27 per cent of their value while shares in Abu Dhabi Commercial Bank dropped 33 per cent. Emaar Properties, Deyaar, the construction giant Arabtec, DFM Company and banking stocks such as Dubai Islamic Bank were also among the main losers. The losses, however, make the valuations very attractive - about five times last year's earnings - which is the lowest in the region, according to a research note by Rasmala. However, since the equities meltdown has been a global event, valuations are also attractive in other emerging markets in Asia and South America. "A fund manager sitting in London or New York has a lot more to chose from. Valuations are equally attractive in all emerging markets and the UAE does not offer anything special," says Ali Khan, a director at Arqaam Capital, an investment bank based in Dubai. "The UAE has never fought for international liquidity as hard as it is fighting now." Issues plaguing the financial services, property and construction sectors have made these stocks "unattractive" for both retail and institutional investors but telecommunications and transport stocks are now a clear favourite with both local and ­international investors. "We have seen selective buying from international funds in transport and telecom stocks. There is some investment in real estate and financial sector stocks but that cannot be described as anything meaningful yet," Mr Khan says. With a drop in oil prices, transport firms are bound to benefit and telecoms stock are favoured in both emerging and matured markets for their sheer resilience. "It doesn't matter where the investment is going, what matters is that we are seeing fresh buying interest from the international institutional investors, which is very encouraging," he says. Both retail buyers and institutions have had their hands burnt in the local markets, while equities-­focused funds have not performed any better, although some funds, such as the Daman Investments Speculators Fund, have outperformed the market. International institutional investors were active in the regional markets until the first half of last year, specifically in the UAE, and according to analysts' estimates were accounting for between 25 per cent and 35 per cent of the total liquidity. The question is whether that money can be encouraged back. Some traders say the fourth quarter of last year and even this year's first-quarter earnings have been factored in and would do little to lift the investment mood. "Investors are ready for a gloomy picture which is very evident from the profit guidance issued by several firms," says a market trader based in Dubai. "Honestly, we are yet to find out the exact impact of the global crisis on the financial institutions, the state of liquidity in the next six months or when institutions will come back to the floor. There are a lot of unanswered questions." According to one trader, regional markets have moved in tandem with the international scene and a change in the shape of global equities markets could force a change here. "Nothing positive can be done here in isolation. We don't live in an igloo any more and there has to be a change in colour elsewhere before we can see some green numbers on the boards here," the trader says. According to Mr Khan, the recovery of the markets is reliant on a turnaround in the housing market. "The markets fall did not start with the decline in the housing market but it will start a recovery with an upside in property prices," he says. "The resurgence of the property market is the catalyst we are looking for." In his optimistic view, the housing market should show signs of recovery by the end of the second quarter of this year as the new entity from the merger of the mortgage ­lenders ­Amlak Finance and Tamweel ­becomes operational and liquidity improves in the mortgage market. "The sooner this merged entity becomes operational the better it is for the housing market and consequently for stock markets," he says. According to industry estimates, the property and construction sectors account for about 30 per cent of the Dubai economy which depends heavily on the export and re-export businesses, tourism and hospitality. However, even if the indexes continue to slide, analysts and traders would prefer the authorities to stay clear of trying to artificially boost the markets. They think that any government efforts to put up barriers or control how much a market should fall to minimise investor losses would hurt investor sentiment further. "It is easy to put up artificial barriers to stop markets falling, but this is not a solution," says Mr Gargash. "It further erodes confidence and hampers the chances of a quick recovery and returning to normality when the economic situation and availability of liquidity improves. The Karachi Stock Exchange, which had put in a floor to avert falls, is one example of what the UAE should not do." He added that the authorities had avoided interfering with the markets even in the challenging times like the First Gulf War or earlier market corrections. "It was a sharp fall last year but still there is no reason to interfere." andIn other words, buckle your seat belts. It looks to be another exciting year. [e-mail]