Increase in speculative activity expected if Dubai wins Expo 2020

14 October 2013

Some UAE stocks have already risen sharply as investors bet on expo win

If Dubai is awarded the Expo 2020 on 27 November, an increase in speculative activity will lead to volatility on the UAE’s stock markets, according to investment bank EFG Hermes.

“We believe that a win for Dubai may generate a brief rally in UAE stock markets, but this will be rapidly followed by a bout of profit-taking in which investors sell the fact. However, this is likely to be a brief pause in a longer uptrend,” it said in a research report.

A similar trend occurred when Qatar was awarded the World Cup 2022 at the end of 2010. The Qatar Exchange’s gains for the year rose from 18 per cent before the award to 26 per cent at the end of the year. Investors sold off in the following months.

In recent months, investors have already been betting on Dubai being awarded the Expo 2020. Together with increased confidence in the emirate’s economy, it has led to some stocks rising sharply over the past year. Dubai Investment Company, which owns land next to the Expo 2020 site, has outperformed the Dubai Financial Market General Index in recent months, having underperformed earlier in the year.

Dubai’s bid dossier estimates hosting the expo will cost $8.7bn in total – $7bn in investments, and operating expenses of $1.7bn. Capital expenditure will mainly cover the development of the expo’s planned 4.4-square-kilometre plot in Jebel Ali and connecting infrastructure, such as extending the Dubai metro’s red line.

To meet those obligations, addressing emirate’s existing debt will become even more pressing than it is now, says EFG Hermes. “If the next phase of the investment cycle, accelerated by the Expo, is not met by revenue-building measures and asset sales, this could result in total Dubai debt rising to 110-115 per cent of gross domestic product (GDP) by 2020, up from 102 per cent of GDP currently.”

But while some risks will require more attention, Expo 2020 could also help the emirate diversify its economy. To accommodate the event, growth in sectors such as tourism will be needed, which could lead to an increase in Dubai’s non-oil GDP growth. An expo win could add about 0.5 to 1 percentage points to UAE’s real GDP growth in the first few years after it is awarded, accelerating closer to the event, according to EFG Hermes.

Taking the expo into account, it estimates real non-oil GDP for the UAE at about 5-6.5 per cent until 2015, increasing to about 6.5-8 per cent in 2016-18 and 8-10 per cent from 2019 to 2020.

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