The UAE stock market indices, DFM and ADX, have been trading in a narrow range since the beginning of June. This is in contrast to what was happening on global indices, which had seen strong upward moves on account of abundant liquidity.
The muted performance of UAE equities might also have to do with lackluster oil markets, with prices struck at the same level for the better part of two months. Having said that, DFM and ADX did manage to trade above their 50- and 100-day simple moving average for the last one month or so.
The key question is what will be the trend for UAE equities in coming weeks? Narrow trading ranges tend to result in strong moves in either direction in the case of a breakout. Given the correlation with oil prices and being a trade and finance hub, what happens in UAE equities will depend a lot on the global scenario.
Hitting a pause
By this, we mean the developments unfolding with regard to the coronavirus scenario. The second wave of the pandemic means that reopening plans are delayed in many parts of the world.
There is a growing realization among policy makers that the world will have to live with the COVID-19 for years to come. So the process of reopening is likely to continue, albeit at a gradual pace. This means the recovery in UAE equities will be more slow and steady.
Among UAE equities, fundamentally strong real estate stocks will be interesting plays on account of strong global liquidity. The continuous debasing by the Federal Reserve means US dollar is likely to be cheaper.
This should increase the allure of UAE assets for foreign investors, with real estate being the most prominent one.
The trading range of ADX is 4,200-4,420 and for DFM it will be 2,030-2,170.
- Vijay Valecha is Chief Investment Officer at Century Financial.
