The month of May has traditionally been an underwhelming period for Gulf stock markets. Can the bounce back happen as soon as June? Image Credit: Shutterstock

The Dubai equity market has been under mounting pressure in the past three months, down 8 per cent, mainly due to investor concerns about geopolitics, soft oil prices, and uncertainty on the interest rate situation. The market index has turned negative for the year, and last week's trade broke below its 2024 opening level of 4,060.

With the overall momentum bearish, the question of when the markets will recover and at what level becomes crucial. Let's delve into the key trends and the way ahead for the markets.

Correction part of broader Gulf-wide dip

The ongoing decline in index prices is at par with the broader decline in other regional equity markets. The Saudi Tadawul, Qatar DSM, and ADSMI have declined over the last three months with average losses of 7-9 per cent. Broadly, the declines can be primarily seen in line with oil prices correcting from their yearly highs seen during mid-April. After this, oil prices have failed to recover and seem increasingly showing a downward consolidation pattern.

Geopolitical risks trumping decent earnings trends

Earnings from most of the mega-cap names - including Emaar, DEWA, FAB, and TAQA - have broadly come in line with and, in some cases, even exceeded market expectations. While a few names showed a decline in net income owing to one-off write-offs and other exceptional items, the overall EBDITA growth neared double-digits on a year-on-year basis.

In fact, the enthusiasm in the local real estate space can be judged by the fact that big names like Emaar are currently sitting on record order backlogs and offplan bookings. Despite imposing a 9 per cent corporate tax, banking names have shown nearly 15-20 per cent growth in their net income. The banking sector trends are supported by ample liquidity conditions and high fee income.

The geopolitical tensions emanating from the Gaza war and news surrounding the death of the Iranian President are keeping the investor sentiment in anxious mode. The Middle East is once again a central focus.

The May legacy

For Gulf equities, the month May has corresponded to some of the highest and most consistent losses over the past 10-year cycle. This seasonality has affected most Gulf equities. As such, the ongoing decline in Dubai equities is no surprise to veteran investors.

To put things into perspective, examining index gains/losses during May, the Saudi Tadawul has declined in 7 out of the last 10 years. Similarly, the DFM index had declined in 8 out of the 10 instances.

Much of the decline can be attributed to sluggish service non-oil sector activity, evident from PMI activity (private non-oil sector trends). These numbers have often shown stagnation during the May to June period.

Technical levels

The DFM index fell below its critical 200-day SMA technical level during mid-May. The index has deviated 2.5 per cent from its 200-day average, indicating bearishness in the prices. One key support area to watch out for would be the base near the 3,750–3,800 zone.

Despite Gulf nations' ongoing diversification drive, trends underlying oil prices continue to dominate regional investment sentiment. Oil prices must stabilise and bounce back above $75–$80 levels.

For most Gulf oil producers, the fiscal breakeven oil price per barrel has increased owing to massive non-oil economic sector expansion and spending on infrastructure-related projects. This translates to a need for higher realised oil revenues.