The main index of the Dubai Financial Market fell by four per cent yesterday after weekend warnings from the UAE Central Bank that the local property market was overheating. ArabianMoney remarked at the time that it was the stock market that was too high not house prices.
Ramadan effect
Ramadan is coming at the end of June and the Holy Month is not usually a good time for local stocks. People prefer to spend their days and nights with their families. Summer also marks a seasonal low for local business with many top business people absent for the hottest weather.
The argument that the local economy is in robust form is a poor one for buying stocks which are valued according to waves of emotion in the stock market rather than economic fundamentals. Consider how price-to-earnings ratios have doubled in the past couple of years while the UAE economy has been growing at four to five per cent, a respectable but not remarkable figure on historic reckoning.
Overvalued stocks
Dubai stocks have indeed become some of the most highly valued equities in the world. A correction from these heights is only to be expected. However, such corrections generally take many months to roll out and the recovery phase maybe slow.
After the stock market crash in 2006 it took the DFM six years to finally hit rock bottom before its recent spike into the stratosphere of global equity markets. History might just be about to repeat itself, not because the local economy is in trouble but because stocks have risen far too high, far too fast.
That does seem to be the way things work in a retail investor dominated market like the DFM and absent long overdue reforms this pattern is very likely to be replicated. Perhaps next time around there will be the necessary changes implemented to make the UAE bourses less volatile and more attractive to stable, long-term investors.
Meanwhile we have to live in the present and the immediate outlook for UAE stocks is not good.
