Investors proceed with caution

08 July 2005
The UAE bourses have again topped all previous records. The Shuaa UAE index is up by 86 per cent since the start of the year and still rising, while trading is reaching ever higher volumes. Average turnover in May was about AED 1,700 million ($463 million). In June, it averaged about AED 3,700 million ($1,008 million), with turnover on 26 June alone setting a new record of AED 4,700 million ($1,281 million).

The driving force continues to be the high levels of liquidity being pumped into the market, coupled with the anticipated strong second-quarter results from the federation's blue-chips. 'The actions of the bigger companies such as EmaarProperties and Amlak, which both doubled their capital, or Shuaa Capital, which increased its capital by 47 per cent, have been welcomed by the market,' says Shuaa Capital's Joe Kawkabani.

Things are unlikely to change in the short term. With Q2 results expected to show 60 per cent annualised growth, investors appear bullish to say the least. 'These are very short-term growth figures and could last for a quarter or could last for a year, but not more than that,' says Kawkabani. 'The tendency now in the market is to price companies at this short-term growth. This is dangerous because investors are no longer looking at fundamentals such as the sustainability of the earnings.'

As a result any signs of weaknesses such as a sharp fall in commodity prices or growth rates could cause a sudden correction. 'Today, I can't see anything imminent that could trigger a reversal of trends, but all we can do is to advise investors to be cautious in these expensive markets,' says Kawkabani.

The flood of initial public offerings (IPOs) is also a concern, with as many as 20 to be launched imminently or under consideration. The level of investor interest was reaffirmed on 6 June, when the IPO of shares in Abu Dhabi-based Surouh Real Estate Companyclosed 175 times oversubscribed. The upcoming IPOs in Abu Dhabi National Energy Company (Taqa), recently created with capital of AED 4,100 million ($1,118 million), and Al-Noor Capital Investmentappear assured of a strong response.

While the IPOs should be sucking liquidity out of the bourses and triggering a correction, accessibility of cash has meant that they have worked as a catalyst for the market with more locals and foreigners being lured in by them. 'I wouldn't pay these premiums for companies that have just been established. But many have some type of government investment, giving investors confidence that these projects are going to work.'

With the market continuing to rise, trusted stocks such as Emaar, cement companies or banking stocks will continue to be the safe bet. Elsewhere, if the market were to turn around then companies such as Amlak or Dubai Investments, which have primarily succeeded due to speculation, may well suffer. Ultimately, though, the frenzied UAE market is no longer as attractive as it once was.

'I wouldn't advise the UAE markets at the moment. I'd say look at Oman and Kuwait in the Gulf or Egypt, which looks promising,' says Kawkabani.

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