Business | Markets
Brokerages brace for tough times ahead
Tumbling shares are forcing brokerages to brace for tough times ahead as the industry is expected to see a sharp drop in fee income and small firms may go out of business if the market downslide continues.
- By Shakir Husain, Staff Reporter
- Published: 00:27 October 10, 2008
Dubai: Tumbling shares are forcing brokerages to brace for tough times ahead as the industry is expected to see a sharp drop in fee income and small firms may go out of business if the market downslide continues.
Although stockbrokers are quite used to sharp ups and downs in share prices, the current seemingly unstoppable fall in stock value has alarmed even established brokerage houses in the UAE.
"We have gone through declines in 2000 and 2003, but this time it seems more acute. We have not seen anything of this magnitude before. This is happening across the world," said Krishnan Ramachandran, chief executive officer of Barjeel Geojit Securities.
But he believes that despite cost cutting pressures, large companies would be able to "weather this storm" as they have resources to adapt to the changing business conditions.
"For well-entrenched firms, there should be enough reserves to survive the situation for a year, but it is quite possible that small brokerages will not be able to sustain losses," Ramachandran said, adding that brokers will have to make adjustments to the way they have been doing business.
Mohammad Al Kiswani, a senior broker at Al Sharhan Stock Centre, said many stockbrokers have sustained severe losses in margin trading. "People are losing clients. If clients do not trade, brokers do not make money and we have less profit," he said.
"New brokers will have a hard time surviving. They will exit the market soon," he added.
Many brokerages may already be looking at new forms of businesses to meet their operating expenses.
Vyas Jayabhanu, business development manager at Al Dhafra Financial Broker, said: "There is a real question mark over small firms" and many companies are talking about mergers.
Cost of operation
"The cost of operation is very high. There is an inflationary environment. There will be a lot of mergers. The view is that the market will recover but they cannot sustain till then," Jayabhanu said.
The downfall effectively ends a five-year party of generally rising share value in the local stock markets as strong economic growth provided plenty of opportunities for equity investments and spawned new brokerage firms.
"You are going to see discipline from both investors and brokerage," Ramachandran asserts.
Al Kiswani said the situation in the local market is exacerbated by foreign investors pulling out.
Facing a cash crunch, many financial institutions have offloaded their holdings, triggering a panic among smaller investors.
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