Blood on the bourse floor

Arabtec’s share price collapse was the catalyst for a huge sell-off on the Dubai stock market last Tuesday, an event that resulted in unwanted headlines around the world

The Dubai Financial Market (DFM)’s long bull run came to an abrupt end last week, as investors fretted over the impact of the insurgency in Iraq and a concern that valuations for some of the market’s biggest stocks were over-inflated. Above all, however, the fallout over a management restructuring at Dubai’s biggest contractor contributed to a collapse in the value of its stock, with more than 50 percent being wiped off its share price by Tuesday evening.

That day, the DFM dropped by 6.7 percent, its biggest daily fall since last August, and there were further losses at the Abu Dhabi Securities Exchange. The index roared back the next day, rising by 6.1 percent as Arabtec recovered by 5 percent, but – in many respects – the extraordinary events of last week laid bare a market that is not quite as robust as investors had hoped.

From the wider perspective of the UAE economy, little has changed. The Dubai and Abu Dhabi property markets have witnessed significant growth over the last 18 months or so. Tourism into both cities is increasing, fuelled by Dubai’s position as a so-called ‘safe haven’ amidst regional unrest, spending on hospitality infrastructure and the ever-increasing numbers of travelers who arrive in the country via the likes of Emirates and Etihad.

In addition, the country was also upgraded to emerging markets status in early June by MSCI, a move that theoretically could lead to institutional investors controlling trillions of dollars in assets allocating funds to the local market. Of the nine equities selected for the upgrade, Arabtec was one.

But the rapid growth of the DFM, up by 108 percent over the course of the last 12 months, had led many analysts to question whether values were overblown. In February, the world’s biggest asset manager, BlackRock, cited “signs of speculative excess that warrants caution” and scaled back its share-buying programme in the country. Local investors did not appear to heed the warning, with market dipping only slightly on the day the announcement was made, before resuming its upwards march the next day.

So a drop in values in the short term, no matter how abrupt, could well encourage outside investors to come in.

“We think generally the premium of the UAE market is justified, but maybe not to this extent,” says Sebastien Henin, head of asset management at Abu Dhabi-based advisory and management firm The National Investor. “What is happening is very healthy for the market and I will not be surprised if some foreign money looking at the market and they invest in the market if the market goes further down… maybe 15 to 20 percent from where we are now.”

Henin also pointed out that he did not believe foreign investors would be spooked by the drop, given that their exposure to emerging markets made them familiar with volatility.

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