Business | Markets
Cautious optimism for stock markets
Analysts forecast a good year for the uae and the region.
- By Gaurav Ghose, Staff Reporter
- Published: 00:00 December 30, 2006
2006 - a year which the investors of the region will be glad to erase from their memories as soon as possible.
While Tadawul, Saudi Arabia's stock market, has been the worst performer in the world in 2006, according to Bloomberg Global Survey of capital markets, losing more than 50 per cent of its value, the Dubai and Abu Dhabi stock exchanges have together fallen over 40 per cent.
Qatar has fallen a dismal 36 per cent, and Kuwait has fallen four per cent after plunging 15 per cent in the early part of the year. Only Oman has bucked the trend among Gulf bourses to end the year nearly four per cent up.
Overview
The bearish ride of the UAE markets in 2006 came on the back of a correction that started in November 2005, extending into the beginning of this year, and intensifying in February. UAE stocks fell on the back of a collapse of the Saudi market amid concern that share prices had risen to unrealistic levels relative to earnings.
On March 14, the Dubai Financial Market General Index sank nearly 12 per cent, its steepest decline on a single day since it opened. Emaar Properties, the Middle East's biggest real estate developer, led the retreat, falling 7.2 per cent to a nine-month low for the company. The Abu Dhabi Securities Market declined 4.4 per cent on the same day.
Confidence in the markets was lacking throughout the first two quarters and well into the summer.
Political uncertainties over the Iranian nuclear issue at the start of the year, and again later in the fall, and the war in Lebanon in the summer didn't help matters. Markets rose in August but failed to maintain the momentum.
The UAE banking sector's weak second-quarter earnings didn't do much to help rejuvenate interest in the market. However, their third-quarter results - an improvement of 4.7 per cent over the previous quarter - was encouraging news that again raised hopes of recovery of the markets. Then the Saudi market collapsed for the second time in late October and oil prices slid, factors that might have dashed the expectations of revival in the UAE. The Dubai Financial Market took a severe beating and shed more points.
At the end of November, the Dubai and Abu Dhabi indices were down about 65 per cent and 41 per cent for the year respectively. The November decline triggered margin selling by banks.
The market capitalisation of the UAE stocks, which had surged to Dh899.80 billion at the end of 2005, stood at Dh 514.82 billion on December 28.
Though depressed in terms of volumes at the year end, the twin markets are exhibiting some positive tendencies, particularly in terms of stock valuations. Market average price-earnings ratios have dropped from 40 times to more modest - and some even say, cheap and attractive - 13 times. And all can take comfort in the fact that the UAE's economic growth is expected to be robust at about 11.6 per cent this year.
Sentiments
Investor sentiment has been badly damaged, to such an extent that some analysts feel it will take months, if not years, for them to regain confidence in the market.
"More particularly at the beginning of the year, at every dip in the market, we saw waves of selling triggered by deleveraging by several investors," said Suresh Kumar, CEO of Emirates Financial Services. "Also, there was a considerable amount of overseas money - from Saudi Arabia and Kuwait - which had come into this market on the back of confidence triggered by a continuing rally in 2004 and 2005. We saw that money exiting in 2006, further accentuating the fall."
Seif Fikry, head of brokerage at EFG-Hermes UAE, believes that while local and GCC retail investors' sentiments are frayed and he doesn't see that improving soon, western institutions will have no such negative thoughts.
"They now look at the market and see that the extremely high valuations have come down and there could be some stocks that might have the right value for them to buy," Fikry said.
In fact, most observers feel the worst is over and the prospects for 2007 look better than 2006. While some are outright bullish, others are more circumspect in their predictions.
"I can be sure that 2007 will be better than 2006," said Mohammad Ali Yasin, managing director of Emirates Securities. "But that does not amount to saying much. 2006 saw a drop of about 42 per cent. 2007 will be better than this year in terms that there will be less of a drop. Does that mean it will be up for the year? I'm not sure at this moment."
Kumar of Emirates Financial Services agrees. ''There is now less downside and more upside. It will fall less and the probability is it will rise more. But that's a very general statement. But if I have to be more specific, some stocks will do better and next year will sort out the men from the boys."
The positive sentiments for next year ride on strong fundamentals with no systemic risks in sight, say the more optimistic analysts.
"The fundamental story remains very, very solid," said Haisaam Arabi, managing director of Shuaa Asset Management.
"Moreover, we saw in the third quarter a recovery in the banking sector. And most of the blue chip companies like the Emaars and the etisalats were sustaining 30 per cent growth and it's looking like it's going to continue at the same rate for next year."
Sherif Salem, fund manager at National Bank of Abu Dhabi, concurs: "Although in the short term the markets may continue to be jittery, given the general nervousness of investors, there appears to be a very favourable backdrop for longer-term equity returns, based on such factors as firm economic growth, buoyant oil prices and strong corporate fundamentals."
EFG-Hermes' Fikry is bullish and he reasons that amidst the travails, "we have seen the market's maturity curve has taken a very steep climb and it is maturing faster than we expected. Thus we are now on most of the western institutions' radar screens."
IPO
In a correcting market, a slowdown in initial public offerings (IPOs) is natural and 2006 was no exception. The expectations of more IPOs coming into the market in 2007 are high, and analysts agree that even though they suck out lot of liquidity, they are important for the development of the market. "The more the IPOs, the better the story going forward because that brings more depth into the market," said Fikry. "We need more sectors and more choices within the sectors."
But a caution should be kept in mind. "Yes, we need more IPOs but we need IPOs that are logically priced, in which banks don't choose to make more money than the investor is subscribing for, and they should be in diversified sectors. They should not be all in the real estate or banks or insurance sectors," Yasin said.
The earnings season due to start very soon - in mid-January - will throw up winners and losers. So attention will shift to the companies which have performed well. And all analysts say that based on informed research analysis, one should be able to pick out the growth stocks and stay invested in them.
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