Don’t fear the coming correction in UAE equities

The Dubai index remains 32% higher than it was before winning the Expo, last major correction was in mid-2012
Don’t fear the coming correction in UAE equities
By Adel Merheb
Thu 13 Mar 2014 12:19 PM

UAE equities witnessed sell-offs sharp enough to get traders and investors jittery about the prospects of the markets.

There is no question that a 3.8 percent loss on a single day is significant, especially since there was no direct catalyst behind the fall. However, this loss is hardly significant when viewed in the context of the stellar market gains since late 2012.

UAE markets have had seven consecutive up quarters since late September 2012 and eleven out of the past fourteen months were up. Moreover, the three losing months averaged a monthly loss of 4.6 percent whereas the gaining months averaged a monthly gain of 10.6 percent.

The Dubai index (DFMGI) gained as much as 42 percent since the announcement of the Expo win and in spite of the latest pull-back, the Dubai index remains 32 percent higher than it was before winning the Expo.

The reality is that with the exception of the 2013 August-September sell-off which was purely an event-driven fall triggered by the potential war on Syria, we have not seen a healthy correction in UAE equities since mid-2012.

There is little doubt that yesterday’s sell-off carries negative implications in the short-term. In fact, a 15 percent correction from current levels is highly probable.

The markets have been stuck in a tight price range for three weeks and stocks have failed to react to positive events.

Arabtec is a case in point. The company reported what seemed to be a fairly positive development announcing a $40bn project in Egypt but the stock’s initial gains were quickly reversed.

This highlights the loss in buying momentum and though the recent selling activity was limited in size given the low volumes on the decline, markets are known to fall of their own weight. In other words, you do not need heavy selling to push the markets lower.

However, as depressing as the prospect for a near-term correction may sound, a 15-20 percent drop in stocks should create attractive buying opportunities.

This is hardly an argument for an end to the local bull market and the prospects for retesting the levels of 2008 remain solid and very much so.

A correction in the short-term will only help sustain the medium/long-term rally in local equities, so it is something to be welcomed instead of feared.

*Adel Merheb is the managing partner of www.tradeyourmarket.com

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