It’s a scene unique to the trading floors of the Arabian Peninsula, but one that we take for granted living in the region. Investors sport traditional white thobes and ghutrah, the formal headdress. The pace is not frantic like during my days covering Wall Street, but in today’s uncertain climate, traders are making full use of their prayer beads.
While Dubai is eight hours ahead of New York, the market has been swept up in all the volatility linked to the Federal Reserve Board’s interest rate policy. On the day I visited the exchange this week, the main index finished with a loss of another 1.5 per cent, marking it the eighth day of declines in nine trading sessions.
Federico Ghizzoni, the CEO of UniCredit, Italy’s largest bank, was in the UAE looking to expand his operations in the country. In our sit down interview, he said “probably the change of policy makes sense because the volatility the last few quarters has been very high”. He believes central bankers would be “justified by this interconnection” between equity losses and the currency fallout within emerging markets.
Regional investors are clearly being squeezed from the west by US interest rate uncertainty and from the east by China’s slowdown. But it’s better than the $60 dollar fall in crude prices that has knocked the legs from under the Gulf stock markets in particular. Many remain in bear market territory, with Saudi Arabia’s Tadawul Index down better than 30 per cent over the past year.
With oil prices tumbling, excess capital is beginning to dry up, and that is spilling over into the non-oil sector of the economy. Residential real estate prices in Dubai for example, according to HSBC, tumbled 9 per cent year-on-year in August.
“Today we see oil at roughly $40, for sure it will affect us in the coming period, maybe in the coming two to three quarters. We will see the effect on infrastructure spending and on all kind of projects,” Walid Al Khateeb, General Manager of Daman Securities, told me on the floor of the DFM.
It was the first time I had visited the exchange since June of 2014. Back then, oil was at $115 a barrel and it was “boom-time” in the market. The index was trading above the 5,000 level and at that stage, Dubai was the best-performing market worldwide, having surged nearly 200 per cent in an 18-month period.
There was excitement linked to the MSCI upgrade to emerging market status in May of 2014 for the UAE and Qatar, combined with Dubai securing the bid to host EXPO 2020.
Sebastien Henin, Head of Asset Management at The National Investor, said that period was unique and the equivalent to a perfect storm, because valuations were in his words “dirt cheap”, nearly the same levels of the 2008-09 global financial crisis.
Gulf markets are still not expensive today. Dubai and Abu Dhabi are both trading below a price-to-earnings ratio of 10. But there is not the willingness at this stage to jump back in, particularly after the summer stock market washout. Henin said that from the end of June to the end of August, the MSCI Emerging Market Index was down 16 per cent, the worst performance since the crisis. Unlike Russia and Southeast Asian markets where investors have also been hit by currency losses, economies in the Gulf remain tightly pegged to the dollar, which offers some stability, but certainly no buffer against bear markets. Prior to this latest leg down in oil prices, the International Monetary Fund predicted regional growth of 2.4 per cent this year and perhaps 3 per cent in 2016, which may require a revision lower if Goldman Sachs’ prediction of $20 oil proves correct. We all recall when oil was above the century mark, growth was averaging 5-7 per cent depending on the country.
The internationalisation of the UAE and Qatar with recognition from the MSCI was a welcomed signal, but institutionalisation of these exchanges is still lacking, according to Henin. Combined, the two countries represent about 1.5 per cent of the emerging market index and international and local institutional investors have not leapt in during this period marked by high volatility and steep losses.
“We need the economic visibility for the country back,” said Henin and today’s oil market is not providing that comfort.
The writer is CNN’s Emerging Markets Editor.
