Adel Merheb explains why he believes local equities are set to rally on foreign buying
The recent days have witnessed interesting developments in the UAE equity markets and considering my bearish opinion piece published on March 28, an update on the Dubai Financial Market General Index (DFMGI) is in order.
Having argued that a corrective wave in the index could extend to the 1700-1750 zone ten days ago, I am now compelled to highlight the recent developments which actually point in the direction of further upside in local equities.
Simply put, the main reason why I think the market may rally on from here - as opposed to extend its late March corrective wave – is the comeback in foreign buying activity.
For those of you who missed it, I had mentioned in an earlier publication that the major rallies in UAE equities have consistently been driven by foreign flows and I had stressed the importance of gauging the direction of these flows when attempting to determine the trend in the market.
Foreign investors have been the primary cause of bull and bear waves since 2008 and betting against their actions has proved unwise as it typically led to lost opportunities or poor investments.
I am not sure why foreigners are buying back into the market especially since recent global events hint at a risk-off mode as of late, but if I am to take a bet, I would say this hot money is playing the earnings season game.
There is a good chance we see foreign investors buy ahead of the Q1 financial results and sell post the announcements.
The interesting bit is that the rally in the last few sessions has been led by some of the small cap stocks which may set the stage for a catch-up move by the heavyweights (think Emaar) – a similar pattern was witnessed at the beginning of the year.
I have to be honest and say that this is a tough call and how far this rally can extend is a difficult question to answer. However, one thing I am comfortable saying is that the rally will likely be sustained as long as foreign investors remain net buyers.
* Adel Merheb is the Managing Partner of www.tradeyourmarket.com