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.