Dubai: The underperforming Dubai Financial Market (DFM) General Index is caught up in a whirlwind of negative news, and there are no signs of it going away for now.
First, it was Emaar Properties’ lower-than-expected dividend, in the wake of Emaar Development’s initial public offering (IPO).
Now, corporate governance issues emanating from Abraaj, which has been accused of commingling funds, along with a sluggishness in the economy and also money moving out to chase attractive Saudi equities are souring sentiment and adversely impacting local markets.
“UAE markets are affected by poor sentiment caused by various factors — disappointing dividends, rotation into Saudi Arabia, overall sluggishness in the economy. Corporate governance issues have clearly not helped. However, the fact that most companies have minimal or no exposure [to Abraaj] is comforting,” Vrajesh Bhandari (right), portfolio manager at Al Mal Capital, told Gulf News.
The DFM index has shed 13.73 per cent so far in the year, making it the worst performer in the region.
On the other hand, the MSCI Emerging Market General Index has shed only 7.6 per cent on a year to date basis.
Lack of transparency
“The UAE market is currently held back by the lack of transparency between management and investors. The Abraaj disaster resulted in a set-back [for] many companies, particularly Air Arabia and Ajman Bank, due to the relatively significant exposure which investors were unaware of until they were forced to disclose,” Issam Kassabieh (right), a senior analyst with Menacorp, told Gulf News.
The UAE’s Securities and Commodities Authority (SCA) asked the companies to disclose their exposure, but a few companies missed the deadline.
In all, out of the total of 51 listed companies on the Dubai Financial Market, 42 firms have revealed that they don’t have any exposure to Abraaj, while only four companies revealed their exposure — the biggest being Air Arabia, which had Dh1.2 billion in investments in the embattled private equity firm.
“The damage [from Abraaj] has been much less than expected in most companies, especially in the leading ones. We have been seeing a gradual recovery on the Dubai index. We still are going to be in the range of 2,900-3,100,” Mohammad Ali Yasin (right), chief executive officer of First Abu Dhabi Bank Securities (FABS), said.
But that is not enough for the market to recover from its bout of underperformance, given the other issues, and the very low participation by institutional players.
Traded value has fallen to Dh4.42 billion in June, compared to a staggering Dh43.8 billion in May 2014 when the index was hovered around the 5,000 level.
The index traded less than 3,000 last week.
“There are a handful of reasons as to why investor sentiment remains low. Many of the difficulty arises from the lack of transparency and the absence of regulators. We see this with Drake & Scull, for example, as its turnaround strategies are heavily funded by Tabarak Investment with amounts that investors aren’t privy to,” Kassabieh said. Last week, Tabarak confirmed that it now holds 13.26 per cent stake in the company, a huge drop from the 50 per cent stake it held earlier.
There is little hope of any full-scale revival despite heavy losses on the Dubai gauge. According to Yasin, the double-digit losses on the Dubai index may become single digit by the end of year, but that will still be low compared to the 17 per cent gains seen on Saudi Arabia’s Tadawul All Share Index.
In the UAE, the only face saver has been the Abu Dhabi Securities (ADX) General Index, which has managed to gain 7.18 per cent so far in the year.
“In terms of valuations, Abu Dhabi is a bit better. The banking sector held well in Abu Dhabi more than Dubai. We also have also less weightage of real-estate on the index than Dubai. Etisalat and FAB have helped with the positive momentum on the index, while in Dubai, [the index] was negatively impacted by real estate companies,” Yasin said.
And the local stock markets have been facing direct competition from bank deposits, which have been offering more than 4 per cent in returns.
“The interest rates on deposits have started to inch closer to 4 per cent and may see 4.5 per cent if we have two rate hikes till the end of the year. [For] investors who look for yields from equity markets, 4 per cent will be good,” Yasin said.
“If the company distribution does not improve by the end of the year, then the bank deposits will be competing with the equity markets for liquidity, which could spell more trouble.”