There have been false dawns before, but for local markets it really does appear that after a long period of instability there are some genuine signs of recovery, Alan Durrant writes
A I am sure that all readers share my frustration with the performance of local markets in recent years. Whenever the first patch of blue skies have appeared, a thunderous black cloud has quickly appeared to ruin the party.
We were beginning to turn bullish two years ago before the well-publicised local debt renegotiation problems temporarily eradicated all international demand for UAE shares.
Things started to look a little better last summer, but we were derailed by the sovereign debt concerns in peripheral Europe.
When we all came back from our post-Ramadan break last year there was another noticeable resurgence in sentiment that carried local markets up 15 per cent before looming problems in Tunisia, Egypt, Bahrain and elsewhere erased the gains once more.
If ever a market could be described as "one step forward, one step back", the UAE over the past two years would be a perfect example.
Without wishing to tempt fate, this time it does feel different. It is an often-quoted phrase that stock markets can climb a wall of worry, and this is what appears to be happening.
Since the markets bottomed out in March, the news flow that markets have been asked to digest has not been universally positive. In general, the corporate reporting season has been slightly disappointing, with banks and property companies in particular delivering weak results.
With local markets dominated by these two sectors and their fortunes so interlinked, one might have expected a far more negative reaction. Instead, investors seem to be taking the view that any bad news now is one step closer to the end of bad news. Any provision taken by the banks is one step closer to a clean balance sheet.
Any properties that were not completed in the first quarter are a step closer to being completed in the second quarter.
It was interesting to see that even the rescue of Dubai Bank did not harm broad market sentiment or even the price of Emaar, the most likely candidate for a fall in its share price. Again, the market seems to have discounted the bad news and is looking ahead.
As well as anticipating the end of the stream of bad news, markets have had plenty of good news to focus upon. During the troubles that hit much of the region, the UAE was regarded as a safe haven and thus a recipient of deposits, business and even people from elsewhere.
There is no doubt that the liquidity position in UAE banks has improved markedly, as evidenced by the rapidly falling deposit rates offered by local banks.
The UAE will also be a clear beneficiary of the price of oil surpassing the US$100 level, and the benefits of this will trickle down through all layers of the economy, lubricating business as it goes.
But there are still risks to the recovery. We all pray for peace in the region, but must be aware of the implications if unrest escalated. Debt levels remain troublingly high, and this will inevitably slow the pace of any upturn, particularly if combined with a series of late payments that clog up liquidity. However, at least on the surface there appears to be plenty of activity around the nation's restaurants and airports.
If there were convincing evidence that the property market were stabilising, that would be a powerful further boost to both the economy and to stock market sentiment.
National Bank of Abu Dhabi's exchange traded fund, has comfortably beaten both the Abu Dhabi Securities Exchange and Dubai Financial Market indices.
It is currently showing a small profit for initial investors, despite the market turbulence of the last year.
The coming months and years are going to be bumpy. International markets feel fragile as focus returns to debt problems in the euro zone and the weakening growth picture. If this continues, the pressure will grow.
However, if you believe in the inner strength of the UAE economy and believe that we are approaching the end of the bad news cycle, now may be a good time to begin building exposure to the market once more.
Alan Durrant is the chief investment officer of the asset management group at the National Bank of Abu Dhabi
