Dubai Financial Market hits lowest level since 2004

28 November 2011

Dubai market drops to lowest level since 2004 as pessimism grips investors

The Dubai Financial Market (DFM) has suffered one of its worst trading weeks and on 27 November dropped to 1,344.92 points, its lowest level since 2004 before rebounding slightly.

“During the past week, Dubai extended its losses to record lows due to investors’ pessimism,” says Majdi Gharzeddeene, head of investment research at Kuwait-based Kipco Asset Management Company (Kamco). “Recent debt restructuring talks for Dubai Holding, increased volatility and a significant slump in trading have caused investors to shy away from the Dubai market, especially with the lack of any catalysts.”

The Eurozone debt crisis and the continued threat of downgrades of the countries and banks in the bloc have fed through to the DFM, which is more exposed to Western markets than the region’s other bourses. Foreign investors account for about 65 per cent of the DFM’s trading activity, most of which are large regional and international institutional investors. There is still fear that Italy may default. If that happens, equity markets will tumble even further.

Reverberations from the crash on the Egyptian Exchange in late November after renewed protests ahead of elections also fed the negative sentiment among traders on the DFM. The value of shares traded on Dubai’s stock market slumped to $5.3m on 16 November, one of the lowest in the bourse’s history.

“With the recent political uprisings and increased tension in the region, most asset managers are finding refuge in the US and emerging market equities,” says Gharzeddeene.

Generally, confidence has crashed in the region since the beginning of the year with the Arab uprisings. The DFM has lost about 18 per cent since January, shedding $5.5bn off its market capitalisation, which is currently about $47bn. Investors are pulling out and putting their money in what they perceive as safer investments, particularly emerging markets such as Brazil, Russia and China.

Dubai is particularly at risk of a fresh credit crunch since the country has to refinance its debts over the next year. There is about $30bn of debt that needs to be refinanced in 2012. According to IMF estimates, Dubai’s total debt stands at about $110bn.

The one potential piece of positive news for the DFM has been postponed. Index provider MSCI was expected to upgrade the UAE from frontier status to emerging market status from June/July, but this has now been delayed until mid-December. The deadline was extended to give investors enough time to respond to regulatory changes that were implemented in order to meet MSCI’s requirements.

“If the UAE is reclassified as an emerging market, the change would be implemented in the MSCI indices in November 2012. The upgrade would boost foreign direct investments in the region, increase international interest in the private sector, increase institutional presence and coverage for the region and enhance the market’s liquidity,” says Gharzeddeene.

Traders are generally confident the UAE has made the necessary changes to get the MSCI upgrade, which could lead to billions of dollars of foreign investment flowing into markets such as the DFM and the Abu Dhabi Exchange.

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