The Dubai Financial Market General Index (DFMGI) lost 2.30 percent on Monday registering the largest one-day percentage sell-off since June 2012.
At the risk of blowing a one-day market move out of proportion, I believe the recent price action in the UAE equity markets is alarming and deserves proper attention.
In my view, the first warning flag was raised not on Monday, when the market fell 2.30 percent, but last week, on June 3, when the DFMGI reversed an intraday gain of 2.80 percent to end that same session in the red.
What made the reversal all the more significant was that it took place on the highest trading activity the market has witnessed since early 2012 – AED2bn was traded in Dubai alone that day.
The combination of last week’s reversal, the volatility of the last few sessions and yesterday’s sharp pull-back is alarming as it sets the stage for further corrective action in the market.
More worrying is the recent net-selling activity by foreign investors whom we consider the ultimate drivers behind market trends – read my thoughts on foreign investments in our first opinion piece.
We have been outright bullish on the UAE equity markets since the beginning of the year as evidenced by previous opinion pieces but we believe the time has come to raise a caution flag and highlight the increasing probability of witnessing a wider corrective wave driven by foreign selling activity.
That said, there are two potential catalysts that can help the market hold a little longer before a correction unfolds and they are:
1 – An MSCI decision to upgrade the UAE from frontier to emerging market status;
2 – A pick-up in buying activity ahead of the second quarter earnings results.
Though it is very possible that the above reasons may trigger renewed buying vigor in the market before a healthy correction unfolds, we believe the downside risk outweighs the upside potential at this point.
Some may take this as a bearish note and it definitely qualifies as such but one should not lose track of the big picture here.
We are not arguing for the end of the bull market but rather making the case for a probable correction that will be followed by renewed buying activity and new market highs.
Readers should understand that any sizable corrective wave (10-20 percent) in a market that has gone up by 70 percent since June 2012 should prove nothing but a lucrative investment opportunity for months to come.
Putting the short-to-medium-term risk in the context of the long-term opportunity which is at hand should give investors/traders additional perspective.
*Adel Merheb is managing partner of tradeyourmarket.com