Traders at Dubai Financial Market (DFM).
For now, stocks on Dubai Financial Market have had a limited fallout from the virus shock. Image Credit: Gulf News Archive

Dubai: While UAE stock markets have contained the worst of the virus-induced volatility, no one is celebrating as yet.

The risks are higher as stocks in the UAE, as with other Gulf-based markets, are highly susceptible to any volatility in oil prices. Crude dropped 16 per cent since China identified the Coronavirus, and wiped out all the gains made by UAE since the start of the year. These are currently trading in the red.

According to Hasnain Malik, Head of Equity Strategy at Tellimer in Dubai, said Gulf growth remains “quite anaemic”, while adding that while stocks in Dubai are cheaper, they’re still riskier.

But investors are not rushing to sell their holdings and rather taking it as an opportunity to enter emerging markets, analysts say. Especially those investors who missed last year’s rally.

Commodity threat

While equities elsewhere have remained calm on the virus outbreak after a brief initial jittery sell-off, a sizable impact continues to be seen in commodities such as crude, which reflects concerns about the world’s factory - China - grinding to a halt.

Awaiting peak damage

Analysts and economists alike are increasingly cautious as the outbreak has still not peaked, and there are mixed reports coming out of China in relation to when production can be resumed in some of key regions. “While the latest death toll is surpassing 1,000 and the number of confirmed cases is now over 45,000, there seems to be no imminent solution to the spread of the virus,” said Simon Ballard, Chief Economist at First Abu Dhabi Securities. “All of which will likely put an increasing strain on regional economies over the coming months.”

Setting off a hysteria

The world is at peak hysteria with global markets fiercely reacting to the impact on growth in the world’s second largest economy and UAE’s largest trading partner, according to Neil Burnard, CEO at Expense Reduction Analysts.

According to estimates by Warwick McKibbin, Professor of Economics at Australian National University, the wider economic hit from this virus could be three to four times bigger than the $40 billion blow it took from SARS in 2003.

“Locally, business conditions in the UAE worsened for the first time in over a decade as the outbreak risks further disruption to the Gulf’s trade and tourism,” Burnard said. UAE sectors that will be hit the worst will be hospitality, tourism, luxury retail and construction.

Operating conditions in the UAE, the second-largest Arab economy, deteriorated in January, according to IHS Markit. The country’s Purchasing Managers’ Index, which shows the country’s non-oil private sectors statistical measure of change, dropped to 49.3, moving below the threshold of 50 that separates contraction from growth.

Troubles pile up

With Dubai already grappling with oversupply in the property market, analysts said flight disruptions to China are seen affecting the UAE’s transport and logistics stocks. But any impact would be limited given that these stocks aren’t that volatile. (The transport and logistics sector makes up about 8 per cent of the nation’s non-oil economy, according to Emirates NBD.)

“With flights to China suspended – except Beijing – that already means a drop in corporate travel, event attendance, tourism and retail expenditure by one of the biggest feeder markets of all,” Burnard added.