The worst could soon be over for UAE markets as volumes rise

Dubai: There are signs that the UAE markets may have begun to bottom out.

Indicators such as higher trading volumes, some stocks closing limit up after a long gap, minimising of global and local systemic risks, signs of a rebound in oil prices and an altogether general improvement in sentiment point to a steady consolidation process underway in the local stock markets. Abu Dhabi seems poised for a faster recovery than Dubai sometime in the latter part of the year.

"The bottom is not like some magic inflection point that happens suddenly and you wake up to find it one day and then continue to live in a la la land," says Fadi Al Said, head of equities, ING Investment Management Middle East. "It is a steady process and it could take anywhere between three to nine months. I think UAE markets are in the final stages of bottoming out."

The Abu Dhabi Securities Exchange (ADX) outperformed the Dubai Financial Market (DFM) in the first quarter, ending March 31. The ADX recovered 17.12 per cent from its low, but DFM could recover only 10 per cent.

Most notably, the volumes on both stock exchanges have risen in the last two months compared to the previous two. On DFM, shares traded jumped 162.63 per cent from 6.45 billion during December-January to 16.94 billion, whereas on ADX, the rise was lower, at 58.20 per cent from 2.44 billion shares to 3.86 billion.

"The volumes look healthy and the momentum is gaining," said Haissam Arabi, chief executive of Gulfmena Alternative Investments, a regional hedge fund based in Dubai. "We are now reaching a position where we are seeing the signs of the start of a bear market rally."

In March, on one single day, the turnover jumped to about Dh1.4 billion from over Dh1 billion shares.

"To me, that's a significant above-average traded volume and that, also, for the first time we started seeing that happen during an accumulation phase," Arabi said.

Also, notable was Aldar Properties and Sorouh Real Estate, closing limit-up last month.

"This means investors are less shortsighted now," said Arabi. "Earlier they used to trade on volatility and square their positions before the end of the session."

The other positive sign in terms of trading patterns has been reversal of trend from one day up or half a session up to uptrend of two to three days, sideways trading of two days, followed by a day of downward movement, closing and stabilizing at a higher low.

At the local systemic level, the market has priced risks, which include poor performance of the real estate and banking/finance sectors, population decline and deteriorating overall demand.

"This is already bad news and the market is not expected to react any more negatively to it," said Al Said. "But, yes, if the major real estate and banking companies come and say we are facing solvency issues and are are about to go under, then the market has to re-price the risk. That I think is unlikely."

With the government of Dubai launching a $20-billion (Dh73.4 billion) bond programme in March and various other measures taken by the Central Bank and the Abu Dhabi government, including capital injections and guarantee of deposits in the country, it is hoped that concerns of liquidity and refinancing debt will be alleviated.

On April 1, the price earning of Dubai was 4.8 times and Abu Dhabi it was 5.9 times, which Al Said said indicates the market is not pricing growth, on the contrary, is pricing declines.

According to Shiv Prakash, equity investment analyst, technical, on the Dubai market, Air Arabia, Arabtec, Emaar, Dubai Islamic Bank, Dubai Financial Market and Islamic Arab Insurance Company, gained strength from lower levels.

In Abu Dhabi, there was good buying on lower levels and Aldar Properties, Sorouh Real estate, etisalat, Aabar Investments, Abu Dhabi National Energy (Taqa) and Waha Capital were the gainers.

Though the markets are consolidating, even with some gains from lower levels for real estate and financials, challenges facing both the sectors are not underestimated by the analysts. Liquidity will remain a challenge with the huge loan-deposit gap to be bridged.

A little more clarity is required especially from the distressed banks and real estate companies, they say. The first quarter results are eagerly awaited and it remains to be seen whether there is a further deterioration from the fourth quarter.

"They will be laggards in terms of putting a real valuation on them," said Arabi. "Book value may not be the best indicator in judging a company. Because of write-offs, extra provisions, they are not sure how much real equity is left in those balance sheets."

Globally, there have been some indications of the equity markets looking up and financials leading the rebound (see story below).

Oil prices have also rallied in recent weeks. They had fallen to a low of $37 but recovered to hit a high of $54 and are hovering between the high $40s and low $50s.

Oil prices could reach $65-$75 by the end of the year, according to Opec (Organisation of Petroleum Exporting Countries), but it all depends on the retreat of recession and demand picking up in the US.

"These are healthy signs," said Arabi, "and at the macro level, in terms of government revenues [from oil], we are back at the level where budgets are set. You might not have a deficit as was being feared."

But all such thoughts and expectations might go awry if something significant such as default of the prime market, or the bonds or the credit cards blowing up or some such extreme credit situation arises and engulfs the world in a depression, analysts warned.

In this current scenario as the market gradually consolidates, Arabi as a fund manager would still stick to stocks based on pure cash flow analysis - how capital adequate their balance sheets are and his picks are the same defensive stocks such as etisalat and Air Arabia which he recommended earlier in January.

"We believe that value is usually driven by a firm's ability to generate cash flow over the long term," said Nicholas Wright, head of institutional brokerage at Mubasher Financial Services. "Furthermore, a company's cash-flow generating ability is driven by long-term growth and the returns that the company earns on invested capital relative to its cost of capital.

With the markets gradually bottoming out, it's time to be a little more aggressive in terms of equities and fixed income, said Al Said. "If someone was holding 60 per cent cash and 40 per cent equities, he said, it's time to turn it around, depending on one's risk profile."