It’s summer time and stocks are hot

UAE markets have been on a scorching run and with the Dubai Financial Market and the Abu Dhabi Securities Exchange indexes closing last week at multi-year highs, it appears traders are in no hurry to ‘sell in May and go away’.

At the close of the third week of May, the Dubai benchmark index was up a staggering 7.52 per cent for the month and for the year, it has gained 41.55 per cent. The DFM General Index has jumped a record 25 per cent this quarter, making it the best performing in the world, according to a Bloomberg tracker measuring gauges of 94 countries. The value of traded volumes on the exchange crossed a billion dirhams twice last week.

The capital’s exchange has not been left behind, with its measure advancing 7.35 per cent for the month and 33.57 per cent for 2013.

Analysts believe that the momentum of the current uptrend is likely to continue this summer, even though the month of Ramadan falls in the season.

“The fundamentals of the UAE market are very strong and I would expect the current strength that we are witnessing to sustain,” said Saleem Khokhar, head of equities at National Bank of Abu Dhabi’s asset management group.

Gomma believes that unlike the “hot” money of 2008: “The UAE is the main beneficiary of Arab spring and a good chunk of this money will stay in the system for sometime. So that will provide a support for the market even in the weak time like summer.”

Historically markets tend to underperform in the six months from May to November and outperform from November to April, pointed out Gomma. “We have seen the outperformance. The next six months the market will do good but relatively speaking, compared to the past six months I feel it’s going to be the same.”

However Khokhar does not rule out volatility and he foresees some minor corrections, though he does not expect these to be severe.

Gomma agreed. “We all agree that the UAE and DFM being the best performing market in the world at this stage, there will be some profit taking by investors. [But}, I don’t expect a huge correction in the market. It will be a very moderate correction.”

In an interview with Gulf News last week, Qaqish said that market trends have changed and their momentum is strong. While there will be profit taking on a daily basis, on specific stocks, generally things are looking better.

With debt cheap, Dubai is expected to successfully reschedule its loans. And with its recovery on track, as measured by rising real estate prices and growing trade, analysts and investors are rerating their market valuations.

“There is a structural change in the whole Dubai story now,” said Gomma, “I think this is going to continue for the next couple of years as long the interest rates are low”.

Saleem Khokhar, head of equities at National Bank of Abu Dhabi believes that near term catalysts include the possible upgrade of the UAE to “emerging market” status.

However, he added: “An upgrade [to emerging market] is an important, but is not the main reason for the current strength that we are witnessing. Other factors include the resurgence in confidence in the UAE, excellent valuations and good dividend yields,” said Khokhar.

Gomma said: “I assume the institutional investor is keeping an eye on this because it will be a big event for the market, but I don’t think [it will have] the same impact of the past two years”. In recent years, the anticipation of an upgrade saw the markets climb, but then fall when the decision was postponed.

In any event, if an upgrade of the market - scheduled to be announced on June 11 - happens, the UAE will only be included in the emerging markets mix from June 2014.

“If it happens, you will see more liquidity coming into the market, from both retail and institutional investors,” said Gomma. “So while people will not give it as big a weight as in the past, it is also true a that lot of money is still waiting in the sidelines [of the market]. If the upgrade happens markets will fly.”

This story does not constitute investment advice.