Is the Expo 2020 euphoria about to expose weaknesses in Dubai's Financial Market?
A huge surge in the Dubai Financial Market this year and last has left it vulnerable to a massive correction. The DFM more than doubled in 2013 and is up a thumping 60 per cent so far this year.
The price-to-earnings ratio has swung from an under-valued 10 to an extremely over-sold 21. Emerging markets in the MSCI Index, whose highly prized inclusion of the UAE started last week, are priced at a p/e of 12.
Spot the potential for the Dubai market to halve in value! Indeed the switch from frontier to emerging market status may not be the bonus as advertised. Last year frontier equities were out front and emerging markets tailed badly with a five per cent fall in value.
The logic of MSCI inclusion is therefore lower and not higher values on the DFM, and for a lesser correction in prices on the also highly valued Abu Dhabi Securities Exchange.
Contrast the 60 per cent surge in the DFM this year with the far more modest two per cent gain from the so-called emerging market dynamos of Brazil, Egypt, Turkey, India, Russia, China and Indonesia. Will these markets catch up or Dubai fall into line?
What’s really been happening in the UAE? Basically there has been a swing in local market sentiment from a completely depressed phase that lasted for six years up until a market bottom in early 2012 and then a strong correction as the economy returned to growth and real estate picked up in 2013.
From the middle of 2013 some special factors kicked in. First came the MSCI inclusion with predictions that this would force global fund managers into UAE equities for the first time, with some wild over estimates about just what that would mean in terms of new stock buying.
Then Dubai won the Expo 2020 for the UAE last October and the anticipation and actual win spurred local enthusiasms, although the total economic impact will be marginal. At the same time new property transfer taxes leveled off the real estate market and so speculative investment switched to stocks.
That’s where the bubble of this year has come from. Sure Dubai companies have enjoyed a post-recession profit boom after their huge write-offs in the crash of 2009 but this is more than reflected in stock prices with a price-to-earnings ratio of 21.
What’s coming next is clearly a pre-Ramadan correction. If nothing happens in global stock markets then the DFM will wait right until the last minute before the Holy Month. If global stocks correct before then the DFM will fall like a pack of cards.
We’ve seen this happen twice before: in early 2006 after the near doubling of the market in 2005; and in 1999 when the Emaar-IPO bubble burst. It will happen again.
After 2006 what really drove a stake through the heart of the UAE stocks markets was the wave of IPOs that drained its liquidity and pulled the market lower and lower until it was down by almost 90 per cent.
Will that be avoided this time? Well history is repeating itself now so probably not.
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