UAE expected to escape emerging markets drubbing

Emerging markets fall in the wake of Fed tapering and lower Chinese manufacturing confidence

Stocks and currencies in many emerging markets fell on Thursday. Maxim Shemetov / Reuters

Emerging market equities continued their slide on Thursday, but stock markets in the UAE were barely dented – and one leading investor expects them to continue to hold firm.

The drops in many emerging markets were a reaction to Wednesday’s move by the US Federal Reserve to continue tapering its support for the markets, as well as diminished confidence among Chinese manufacturers.

The MSCI Emerging Markets Index has fallen 6.6 per cent so far this year.

Yet equities in the UAE and other Arabian Gulf markets are likely to escape the downwards trend, due to their attractive tax regimes and their currencies’ links with the US dollar, according to Mark Mobius, chairman of Templeton Emerging Markets Group.

“Tax rates are generally low in the GCC, and the UAE is a standout in this regard,” said Mr Mobius, who manages more than US$50 billion for Templeton.

“In Dubai, income tax is zero and profits are taxed at zero which makes things very attractive not only for individuals but for companies.”

Arabian Gulf markets were also well positioned to escape the currency fluctuations of the past week, said Mr Mobius.

“Each of these countries pegs its currency to the US dollar except Kuwait, which pegs to a basket or group of currencies,” he said.

“So the impact of the US Federal Reserve’s slowing or ending of its long-standing asset-purchasing programme on these currencies should be more muted than in some other emerging markets.”

The Fed, led by its governor Ben Bernanke, confirmed late on Wednesday that it would reduce its monthly stimulus bond buying by US$10 billion to US$65 billion, the second such reduction in as many months.

Further dampening investor sentiment yesterday was a fall in HSBC’s purchasing manager’s index for Chinese manufacturing to 49.5, the first contraction in confidence in the sector in six months.

Japan’s Nikkei 225 Index fell 377 points yesterday, closing down 2.4 per cent, and 7.9 per cent for the year.

India’s Sensex finished the day down 149 points or 0.7 per cent, while Hong Kong’s Hang Seng and the Shanghai Composite were down 0.4 and 0.8 per cent respectively for the day.

The Dubai Financial Market is the best performing global equity index so far this year, up 11.8 per cent. The Abu Dhabi Securities Exchange is up 8.9 per cent for the year and is in fourth position in the global rankings.

Emerging market currencies continued to suffer on Thursday. The Turkish lira and South African rand continued to fall against the dollar, despite rate rises on Tuesday and Wednesday respectively.