Dubai bourse plunges amid Arabtec-domino effect

Dubai Financial Market posts largest daily loss in 10 months, with six stocks reaching daily limit-down amid broad sell-off

The Dubai Financial Market (DFM) posted its biggest daily loss since August, 2013 on Tuesday, as a slide in construction firm Arabtec, the most heavily traded stock, triggered a chain reaction of margin calls that resulted in a broad sell-off.

The benchmark closed down 6.7 percent after tumbling as much as 8.7 percent at one stage. Six stocks fell the daily limit of 10 percent.

The major fall in August was related to an escalation in violence in Syria and comment from US president Barrack Obama that suggested he may consider military intervention.

However, traders said the plunge on Tuesday was not due to any negative news about the Dubai economy or geopolitical tensions related to Iraq. Instead, the market was vulnerable to heavy selling after retail buyers sent it soaring earlier this year.

Arabtec was the first stock to go limit-down – for a third day in a row. Its loss this month now totals 53 percent, which triggered margin calls and because there were no buy orders for Arabtec at limit-down levels, investors were forced to meet the calls by selling other shares.

Dubai Investments also fell the maximum 10 percent, a day after announcing it had lifted its foreign investment limit from 20 percent to 35 percent.

Others to fall the limit-down were Drake & Scull, Union Properties, Deyaar Development, GGICO and National Cement, whose limit was reached on one trade of 4700 shares.

Major Dubai developer Emaar, which has a significant number of contracts with Arabtec, recorded the largest fall by value, slumping 3.41 percent and losing AED531m ($144m) in value.

The tumble could negatively affect the emirate’s reputation among foreign buyers given its recent upgrade by the MSCI.

One analyst told Arabian Business he predicted the market could drop about 3,830 points “on a technical support level”.

Al Mal Capital’s head of asset management Tariq Qaqish said while it was difficult to predict how far the market would drop he expected the downside to be minimal.

“I do see opportunities on those levels at a fundamental base where stocks are definitely looking more attractive for investors,” he said.

The concern was not only Arabtec, he said, but on how brokerage companies and banks were selling clients to offload their margins.

“Yes, it started with Arabtec bad news, but it’s not ending because we don’t see any complete decisions from the strategic investors, so we still see the ex-CEOs coming back into the media.  What we would like to see is the existing strategic investors to come and talk about the company’s strategy, talk about who’s going to be taking over the share of the ex-CEO.”

Arabtec’s shares began to plummet earlier this month when major shareholder Aabar Investments, an Abu Dhabi state fund, cut its stake in the company from 21.57 percent to 18.85 percent between June 8 and 11.

That was followed by last week’s resignation of chief executive Hasan Ismaik and then reports on Monday that Arabtec’s head of mergers and acquisitions, Shohidul Ahad-Choudhury, had been sacked, along with a significant number of other staff.

In a bourse statement on Tuesday, Arabtec clarified that it had laid off a "limited number" of staff in order to improve productivity and reduce costs, adding that all its actions had been aimed at protecting shareholders' rights.

A source with knowledge of the matter told Reuters on Monday most of the people departing had either been hired by Ismaik or were perceived to be close to him, raising questions over whether the layoffs would hinder Arabtec's ambitious expansion plans, which include many billions of dollars worth of contracts in the UAE, Egypt and other countries.

Qaqish said Arabec was dragging down the market because investors were stuck in a leverage.

However, despite the effect on other stocks he did not believe there was “any legal issue” that would so far prompt the Securities and Commodities Authority to stop trading on Arabtec stock.

“I don’t see something handling the stock in terms of the fundamental base or the company – it’s all about the CEO has resigned, it happens everywhere,” Qaqish said.

“The issue is that he has a big chunk of the company, which is not a good practice and (Arabtec) should have interfered earlier, especially when he was talking about in the media that the share price was worth more than current levels.

“They should have at least have got a clearer picture, what’s the strategy of a CEO to own 30 percent of a company.”

Arabtec has not commented on the effect of Ismaik’s resignation on its plans or strategy or whether he will retain his 28.85 percent stake in the firm.

Nishit Lakhotia, Head of research at the Securities & Investment Company in Bahrain, says while it is “anybody’s guess” how long the sell-off will continue, however, he believes markets to stabilise leading to July.

“Eventually we will see some smart investors getting into the market specially in good quality blue-chip companies before the 2Q14 earnings start coming in, we had a very solid first quarter earnings season in the UAE and during the second quarter, we expect earnings momentum to be maintained. As a result you may see some sort of pull back of the market,” he says.

“Investors don’t like such volatility as seen in Dubai and will hope that the markets become more stable and they will continue to prefer companies with better corporate governance and transparency,” he says.

He declined to comment on whether the SCA should have halted trading on Arabtec stock, but says there needs to be more transparency on how stakes in a company have moved and on forward-looking statements.

“That is the need of the hour in the UAE, especially if you want foreign money to be in your market,” he says.

Despite the current market turmoil, Lakhotia believes planned listings such as the Emaar Malls IPO later this year should not be affected.

“If you’re a quality company and looking at reasonable valuations you can go ahead with successful listing,” he says.

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Posted by: wmm

No wonder Black Rock, a major global asset manager decided to cut its exposure to Dubai and Abudhabi stock markets way back in February of this year because of signs that markets were overheating.

Posted by: Red Snappa

It is not solely the Arabtec scenario that is driving stocks down, the tumble also reflects the uncertainty generated by hostilities in Iraq, which could not only change the map of the Middle East but radically alter the shape of economies in the region.

I agree with 'Stockmarketcorrection' that the property market is next for the chop, as it too is heavily overvalued and demand has been abnormally hyped by the industry based on winning the hosting rights for the World Expo. However, the security situation has a significant bearing on this demand, because the hostilities are taking place next door, not just several thousand kilometres away in Syria and Afghanistan creating an influx of wealthy evacuees.

For a start events in the region will affect one of Dubai's staples, the tourism industry, just indeed as they did last time, only this time it is likely to be a protracted conflict, involving different forces.

Posted by: Yousuf Abdul Ghaffar

How the ex-CEO was able to raise his stake to 28%. Why he was not stopped earlier by the authorities. This is completely against the corporate governance laws. A person responsible to run the show can not own such as huge stake in the same company. Now who is answerable to the shareholders for the decline in the value of their investments?

Posted by: Stockmarketcorrection

Based on fundamentals (PE Ratio etc) Arabtec stock should be priced at 2 to 2.5 max AED - anything else above this is speculative upside. With most of the C level now departed and serious questions about the who is driving the future strategy of the company the speculative upside should be non existent and there should be perhaps speculative downside. It will take a long time for Arabtec to climb to AED 7 so really do not know where Mr. Ismaik is building this dream from.

The real estate market is the next in line for a correction as this has also been pushed to high levels by speculators - let us hope this is not as severe as the stock market correction.

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