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Mon 20 Apr 2015 01:29 PM

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What really happened to Dubai's bourse last week

Adel Merheb looks behind the reasons why the DFM index witnessed one of its biggest jumps in price and volume

What really happened to Dubai's bourse last week

Thursday was a huge day for UAE markets in general and Dubai in particular. The DFM index witnessed one of the biggest jumps in price and volume we have seen in months. In fact, the volume level we saw on Thursday was last seen in July of 2014 and that was during the aftermath of the Arabtec debacle. In other words, what we saw last Wednesday and Thursday simply cannot be ignored in terms of price and volume action.

Having monitored the net investment activities of the various investor types (nationals vs. foreigners) in the UAE since 2008, I can say that while foreign investors hardly ever represent more than 25% of the daily value traded, their net investments tend to determine the sustainable trends in these market. Having said that, the latest net investment patterns paint an interesting picture and validate what the general public has been fussing about lately, that is, the potential deal with Iran is net positive for the UAE.

The interesting bit is that the one investor group that seems to support that view the most are foreign investors. They were by far the largest net buyers of UAE equities since the framework for a deal was announced. In Dubai alone, foreign net buying activity hit AED 106mn between March 31 and April 7. What makes this number more relevant is the fact that the total net buying activity since then was AED 116mn. This means that foreigners represented 91% of the total net buys.

Now if you thought the net investment figures between March 31 and April 7 were meaningful, check this out:

1- Thursday witnessed one of the largest net buying figure we have seen from foreigners in months with total net investments in Dubai hitting AED 266mn – 2.5 times larger than what we saw in total between March 31 and April 7.

2- What makes Thursday’s move more interesting is the fact that foreigners – and I am always referring to non-Arab foreigners here – were the only ones net long. Everyone else was a net seller.

3- Wednesday was not a bad day either with net foreign buying hitting AED 41mn.

4- To put things in context, the first two weeks of April show a foreign net buy of roughly AED 370mn vs. a foreign net sell of roughly AED 690mn in Q1 of 2015 – a huge shift as you can see.

Basically, foreign investors were pretty much the primary, if not the sole driver of the 16% run-up we have seen in Dubai since the beginning of April and I can’t help but view the big momentum push we saw last Thursday as a precursor to further gains ahead. These were the drivers:

1- It started with the easing of IPO rules to encourage more listings of companies… (March 31).

2- Then the Iran deal framework was announced (April 1)…

3- And then Oil broke out for the first time from its year-to-date range despite record build up in inventory and increased production by Saudi Arabia (April 15)…and by the way, oil is looking quite promising in terms of further short-term gains (more on than in a separate note).

The confluence of the above factors triggered renewed interest from foreign investors following their bearish stance on the UAE in Q1 and it is very interesting to see such a drastic shift and reversal in foreign investment behavior given the positive implications it has on the local market.

Now before I keep going about how positive this shift could be for the local market if it proves sustainable, let’s discuss some context first:

1- The DFM index has been stuck in a one of the most erratic and frustrating trading ranges (3000-4000) since mid-December 2014

2- Despite April being a huge month with a 16% gain so far, last Thursday was the first day that actually marked a directional breach from that range and hence the first day we see a true change in market psychology

3- Not only was the 3000-4000 price range cleared on Thursday but the move was also accompanied by one of the highest volumes we have seen since July 2014

One more thing before I conclude on this…Almost all of the net foreign buying we saw in Dubai on Thursday went into Emaar and Dubai Islamic Bank with Emaar taking the lion’s share.

April 16/ in AEDmn: Emaar

Net Investments: 210

% of Total Foreign Net Buy: 77.9%

April 16/ in AEDmn: Dubai Islamic Bank

Net Investments: 44

% of Total Foreign Net Buy:16.5%

This is very interesting because it highlights two things:

1- As always, foreign investors tend to get into the blue chip liquid stocks whenever they allocate exposure to the region. They use these stocks as proxies.

2- The solid Q1 results by Dubai Islamic Bank and the dismissal of fears over AlAbbar’s rumored departure during Emaar’s AGM have probably induced and increased the size of foreign flows on Thursday.

In Summary, we simply cannot ignore the positive signs we have seen since the start of the month/Thursday and although 50% to 60% (or more) of the rally might already be behind us, the signs discussed above hint at a possible run-up to 4500 on the DFM index.

Naturally, the 10%+ upside potential does not come without risks given the developing geopolitical situation in the region and the weak signals we are getting from US equity markets – Friday was a big down day for US equities – but investing is all about taking calculated risks and the recent positive signs do seem to justify taking that risk.

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