Not a day has gone by when traders — the few who are trading — and analysts have not spoken ruefully about the dreadful trading volumes when commenting on the UAE markets these days.
Those volumes plummeted in July to their lowest levels for the year across both UAE markets. Dubai Financial Market's (DFM) volumes tumbled more than 46 per cent over the previous month and Abu Dhabi more than 36 per cent, and they were a combined 71 per cent below their July 2009 levels.
Turnover figures for the year don't look good either. The average trading values until now have shown a precipitous drop when compared to the past two previous years.
For the year, the average daily traded value on DFM has been Dh328 million, less than half of last year's Dh699 million and about one-quarter of Dh1.23 billion in 2008, according to Zawya.com, a market information portal. Abu Dhabi Securities Exchange (ADX) has performed no better. The average on ADX so far this year has been Dh131 million compared to Dh279 million in 2009, and Dh939 million in 2008, drops of more than 53 per cent and 86 per cent respectively.
In the UAE and GCC generally, the market is dominated by retail traders, and the current depressed volumes imply they are not participating as they typically have in the past. No doubt this is partly because of the summer, when many of them cash out and decamp to various holiday destinations. Furthermore, a few institutional investors have told Gulf News about their selective, therefore uncommitted, approach to participating in the UAE and Middle East and North Africa (Mena) markets. In July, when equity indices in the US — the S&P was up 7.2 per cent last month — and Europe did go higher upon strong earnings and the surprisingly good results of the stress tests of banks respectively, there was hardly any effect on the local markets.
So it looks like there is something more to this downbeat trading scenario than just the seasonal lull. So, what's going on, and what hope is there of the liquidity improving any time soon?
Adverse issues
Among the adverse issues hanging over the local markets is the so-called trust deficit of investors — local, regional and international — surrounding the lingering Dubai World's restructuring process. But that's still only one of the several factors affecting sentiment, and opinion is divided whether a successful resolution of this headline issue will help trading.
"There is a lot of uncertainty around how Nakheel is going to pay its debts and how Dubai World is going to sort out [its] issues with its different entities," says Jeff Singer, CEO, Nasdaq Dubai. "I think that until international investors, as well as regional and local investors, get a better sense of Dubai's path out of debt there is going to be a bit of sentiment overhang, a reluctance to continue to put money in the market."
In this regard, the [future] of Dubai affects Abu Dhabi too, adds Singer. "I have heard it all over Europe: how Dubai goes, Abu Dhabi is going to go certainly as well."
Dubai World's discussions are relevant certainly to the banks. A closure on the issue would certainly put an end to their uncertainty, says Haissam Arabi, chief executive of Gulfmena Alternative Investments, a hedge fund based in Dubai International Financial Centre (DIFC).
"A successful conclusion on that will provide, one assumes, a certain degree of visibility going forward in terms of what the banks' exposures really are and how they will treat those exposures depending on what the final terms will be. You may well get some interest in the banks in Dubai in particular," he suggests.
So, for one, key sector there is a key factor to watch that could lead to a significant uplift. But for other sectors, as Ali Khan, managing director at Arqaam Capital, Dubai, points out, "we aren't seeing the price action, because earnings are weak or at best neutral." One can highlight, for example, the telcos and the logistics sectors. "Investors are now paying for earnings growth. Unless they are convinced of a firm's ability to generate that, they are tending to sit on the fence in our region."
Also, real estate sector's recovery and the weak results of property companies act as a particular dampener too, according to other fund managers. It's notable that the UAE market's — for both the DFMGI and ADX indexes — the largest component sectors are real estate and banking. "Sector diversification is missing," says Tariq Qaqish, Fund Manager, Al Mal Capital, an investment bank. "[For] real estate companies and banks, both are facing challenges ahead, and this adds to the resistance of investors to participate."
That idea was confirmed by the uninspiring second-quarter results from both sectors. Paul Cooper, Managing Director, Sarasin-Alpen Partners Limited, a specialist asset management company based in Dubai, says "in this environment, people are unwilling to invest further. They face enough risk in their day-to-day businesses, and many also have substantial real estate holdings, i.e. a direct stake already.
"It is also fair to say that the shortage of liquidity means that not many people have surplus cash at the moment, and fewer still are willing to invest it in the stock market," he adds.
Global factors
However, global factors cannot be discounted. Singer points to Europe. He believes the amount of debt that Europe has taken on makes people nervous. "There are a lot people in Europe who are holding their money tight because they are concerned how the sovereign debt problems will eventually unfold. [In that case], they don't invest in the Middle East and other frontier markets," he notes.
To tempt investors back to the market, for a range of different sectors and companies, will require more than just improved sentiment.
"The absence of foreign investors is also a factor behind the weak trading volumes," says Cooper. "As the local markets are not part of global indices, foreigners tend only to invest when the region is performing well. Sluggish performance recently therefore creates its own deterrent.
There are structural factors, too. While generally improvements in transparency and regulation would further strengthen the markets, the more specific issues of the absence of short-selling and security lending act as a barrier for investors, according to market observers.
"In the UAE you can only make money in an ‘up' market — you cannot make money in a ‘sideways' or ‘down' market. You can't hedge; you can't short the market," says Singer. "Right now what those [market participants] do is get out of the market altogether. So, there are some things that the UAE could do as regards incentives for international investors to stay in the market once they are here."
It's well enough known too that getting the MSCI classification of an ‘emerging market' would help attract foreign investors too.
There is another thing that Nasdaq Dubai's Singer would like to see, namely a change in the delivery-versus-payment method.
The way it works in the West is that buyer and seller when trading a share have three days to come up with the money and the share respectively, enabling brokers actually to trade quickly. Here in the UAE both have to be present at the time of transaction.
In fact that's one of the things MSCI remarked, according to Singer, when discussing with the local exchange authorities as to upgrading the markets' status. Also, the fact that shares in the UAE have to be moved from the custody account into the trading account means it takes additional time, and traders may miss the market [opportunity] doing that, he says.
As to the prospects for the UAE markets for the rest of the year, the hope is that things will improve. but that still depends on several variables, including especially the health of the real estate and banking sectors, whose importance cannot be overstated.
Post-Ramadan (or, some even predict, closer to the end of Ramadan), there could be a small rally as investors return from their holidays. A few local speculators will come in and create some momentum that would prompt that, says Arabi of Gulfmena Alternative Investments. Yet. "that's not the real ‘volume' rally," he says. The real one is going to take longer, while he doesn't say when exactly that might happen.
To assess market direction, says Arqaam Capital's Khan, one needs to have a view on the health of the real estate sector, and the banks' ability to generate loans across not only the keystone real estate sector but the broader market. Current UAE Central Bank data show that, in the year to date, loans and bank deposits have remained relatively flat, or slightly negative.
"Should third-quarter earnings show signs of life, then the respective indexes could add 15 per cent by year-end," says Khan, repeating the relevance of the results data.
Cooper of Sarasin Alpen says much depends on the recovery of the banks in a broader sense. Until the banking sector starts to function properly, with banks [more] willing to lend and consumers/companies willing to borrow, [confidence] is unlikely to be reflected in the stock market, he surmises.
"As much as I would like people to invest now and lock in the long-term growth story, it is far from certain that they will. Next year, on the other hand, should be different — and I expect significant [market] upside for the region over the next year or two. Some investors may choose to anticipate the recovery and buy during the summer or autumn, [but] the majority will probably wait until the improvement is more obvious."
Success stories
Qaqish likewise sees value in investing in the UAE market, especially in success stories that are characterised by growth and a resilient business model, but with a proviso.
"We remain in favour of telecommunication, transportation and energy sectors, as we see grounds for growth and solid earnings." Even so, he applies the ‘caveat' (emptor) that investors should be cautious in the face of lots of variables needing to be monitored closely and carefully.
"The UAE market will remain driven by news. It is also highly-correlated with international markets. Until the negative news clears out [locally], and decoupling happens [from the global trend], we remain cautious in our investing allocation."
With that guidance from a professional, who can really blame the local investor for waiting for the market to swell?
The writer is Financial Features Editor, Gulf News.
