Traditional end of year market rally fails to materialise

Markets Preview: Equity brokers are reining in hopes of bigger trading volumes in the new year amid a slow return of investor appetite for riskier asset classes.

The ADX General Index has risen almost 11.6 per cent this year. Sammy Dallal / The National

Equity brokers are reining in hopes of bigger trading volumes in the new year amid a slow return of investor appetite for riskier asset classes.

A traditional end of year rally - which usually takes place in the last two months of the year - failed to materialise this year. During this period, investors typically buy up stocks to improve funds at the end of the year, a practice known as "window dressing".

"I was hoping for an end of year rally, but it may just be the last two days for the end of the year," said Nabil Farhat, a partner at Al Fajer Securities in Abu Dhabi.

The trading commission would have brought much needed income for the struggling financial services sector. About seven securities firms closed this year, continuing a trend of closures since the onset of the Dubai property crisis.

There are 50 brokerages in operation, compared with 103 almost two years ago.

"I think there's going to be more consolidation next year," said Mr Farhat. "The current values leave room for only 25 to 35 companies to operate."

Many of the trading booths on the floor of the Abu Dhabi Securities Exchange stood empty with the lights turned off. At EFG Hermes' booth, a broker stood watching the few day-traders on the floor.

"Today is our last day, next week ours will join the list of empty booths here," he added.

EFG Hermes, an Egyptian investment bank, on Tuesday said it will shut its Abu Dhabi operations to cut costs, and will instead cater to its clients from its regional headquarters in Dubai.

"A big regional investment bank like EFG Hermes, closing its operations in Abu Dhabi is not a good indication for the sector," said Wadah Al Taha, the chief investment officer at Al Zarooni Group in Abu Dhabi.

"Despite being ranked number three last month in traded value, they are trying to reduce their costs, which means keeping its branch is not feasible in terms of trading."

Trading values have reached almost Dh70 billion (US$19.05bn) for Abu Dhabi and Dubai combined this year, an increase compared to last year's Dh57bn figure, but still below the Dh103bn of 2010.

The volume might not be there but the performance is: the ADX General Index has risen 9.2 per cent this year, while the Dubai Financial Market General Index has advanced about 19 per cent in the same period.

Outside the region, equity and bond traders this week will turn their focus to the looming budget deficit in the United States. Policymakers in Washington must avert a fiscal cliff of nearly US$600 billion worth of spending cuts and tax increases due in January.

"The US until now has not taken any measures to restrain their deficit," said Anastasios Dalgiannakis, the head of institutional trading at Mubasher Financial Services in Dubai. "The focus has been on Europe for the past two years, but the US has equally severe issues on both deficit and debt."

Without a deal in place, a fiscal cliff could spill the world's largest economy into recession. In response, the president Barack Obama said he would vie to secure a smaller package that would extent jobless benefits for two million Americans and "lays the groundwork" to buoy economic growth.

If legislators fail to act in time, the fiscal cliff will have a far-reaching impact, cutting growth across markets worldwide, Mr Dalgiannakis said.

"If the US goes into recession at a time when a lot of markets are barely growing or decelerating, it'll be bad for the global economy and for the Arabian Gulf," he added.

"Be it from the commodity angle, or indirectly through less trade and tourism."

Earlier this year, the ratings agency Fitch warned that the failure to tackle the fiscal cliff and raise the debt ceiling could mean a downgrading next year for the world's largest economy.

Standard & Poor's removed its AAA rating for the US last year after a long-running deadlock between legislators and politicians finally eased and a deal was struck at the 11th hour to lift the debt ceiling.