Why did UAE stocks fall so hard?

Adel Merheb looks at what the markets have in store
By Adel Merheb
Thu 29 Aug 2013 09:24 AM

There is no question that the sharp sell-off we have seen in the UAE equity markets – and the rest of the region for that matter – was triggered by fears over an imminent strike on Syria. However, it would be too simplistic to assume that it was the only driver: It was definitely the catalyst but there is more to it than that.

Those who have followed the UAE equity markets lately know that in the days heading into the recent sell-off, the local markets were pretty much dominated by highly speculative trading activity.

We have seen excessive buying into what I refer to as speculative stocks – stocks that some traders tend to concentrate on to make quick gains in a short period of time - as evidenced by the sharp one-day gains witnessed in various such stocks in the UAE.

Naturally, when speculation gets to somewhat excessive levels in a market that has had a great run for months, all it takes to unleash a wave of selling is a simple trigger.

The day the Dubai Financial Market (DFM) fell by 7%, we witnessed the largest one-day net selling activity by local investors/traders in roughly 5 years.  A net of AED 275 mn was sold by local players in Dubai alone that day.

This number is evidence of the highly speculative activity that the local markets have witnessed lately. Effectively, the heavy buyers from only a week ago turned to heavy sellers – some being forced by margin calls - and it happened all at once causing the sharp drop in stock prices.

The local markets have had a great run since the beginning of the year and as our recent publications and TV interviews have highlighted, there was a strong enough case for a potential correction in the September-October period even prior to witnessing the recent escalation on the geopolitical front.

I said it before and I say it again, we should not worry about a healthy correction in the market as it would set a solid ground for a sustainable rally in the medium/long-term. It is the over-speculative activity which leads to sudden and sharp drops that should be of concern though I admit that it can hardly be controlled.

You might see the latest sell-off as a very negative event but as scary as it may seem, it does put things in order and acts as a balance to the recent over-speculation in the market.

I still think the bull market which started in the middle of last year has more legs to it and barring a series of major down days triggered by further escalation of geopolitical tension, a fruther healthy correction should put us on the path of a sustainable rally in the local stock markets.

*Adel Merheb is the managing partner tradeyourmarket.com

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