Abu Dhabi: Investors in the UAE’s equity markets can expect another volatile year ahead where oil prices, geopolitical tension, government policies, and actions from the US Federal Reserve will continue to define sentiment, analysts said.
With Brent oil prices currently hovering around the $36 (Dh132) a barrel level and supply still flooding the market, analysts said such fluctuations will continue to take a toll in 2016 on equities despite essentially strong fundamentals.
Analysts also expected negative sentiment to overpower attractive valuations on the short and medium terms.
Saleem Khokhar, head of fund management at the National Bank of Abu Dhabi’s asset management group, said that he expected the supply/demand equation in the oil market to start stabilising by the third quarter of 2016.
“I think 2016 will be a little bit difficult in terms of lower growth expectations and in terms of budgets for the governments.
I think there will be a slight slowdown, and we’re already seeing that in the IMF (International Monetary Fund) projections for the GDP (Gross Domestic Product) growth numbers in the region, which, I think, will range from 2.5 per cent to around 3.2-3.4 per cent, so there are expectations that things will be difficult with the lower oil prices,” he said.
Speaking to Gulf News by phone, Khokhar pointed, however, that valuations are now “extremely appealing.”
“When you look at the UAE, there’s tremendous value, so I think you’ve more than discounted the fall in the oil prices and how long that is likely to stay down for. Sentiment tends to overshoot, though, and you end up in territory that is beyond what is sensible, and that’s what concerns me.
Meaningful growth
I don’t think we’re in for a quick, sharp recovery in 2016. I think it’s going to be a gradual realisation that we’re undervalued. Having said that, on the longer term, you’re looking at superb upside potential for the region — about 40 per cent upside is quite feasible,” he said.
Similarly, Vijay Harpalani, fund manager at Al Mal Capital, said that achieving meaningful growth in earnings in 2016 will be very difficult considering the challenging macroeconomic backdrop.
He added that such pressure risks further derating of stocks especially if the overall economic environment continues to slowdown.
“It is also worth noting that challenging liquidity conditions in Qatar and Saudi Arabia, due to government’s funding of large infrastructure projects there, is impacting the liquidity situation here in the UAE.
We believe that while the negative sentiment has already been built into the market, any subsequent change in sentiments will be correlated to direction of oil prices,” Harpalani said.
IPOs
So, what does further pressure and negative sentiment mean for Initial Public Offerings (IPOs)? Even more challenges.
Last month, a report issued by PricewaterhouseCoopers’s (PwC) Capital Markets and Accounting Advisory Services team said that growing geopolitical concerns and wider economic uncertainty echoed loudly in the GCC’s equity markets.
Market conditions
This lead to a slowdown in IPO activity, with interest among GCC companies falling in Q1 2015. While it did pick up some pace in Q2 2015, interest slowed down further in the third quarter on the back of lower oil prices.
PwC’s report said that such sentiment has driven issuers to put any plans of listing on hold until market conditions improve.
Al Mal Capital’s Harpalani said, “2016 will continue to be a challenging year for the primary market offerings. Any potential IPOs even in attractive sectors might be put off for lack of better valuations. We don’t expect much appetite for IPOs next year as valuations in blue chip stocks is beginning to look attractive.”
Technical standpoint
From a technical perspective, the UAE’s benchmark indexes are expected to drop especially in the first quarter of 2016, a technical analyst said.
Osama Al Ashry, member of UK organisation, Society of Technical Analysts, said that he expected the Dubai Financial Market (DFM) index to fall about 20 per cent, projecting new lows for the market in Q1 2016.
He added that he expected the DFM index to trade between the 2,700-2,490 range within the next few weeks.
