Economic growth will be crucial in driving UAE stock market growth in 2014.

While the past year has seen Abu Dhabi and Dubai exchanges rise between 60 and 110 per cent year-on-year respectively, the coming year is likely to be slightly less spectacular as the markets are no longer undervalued.

The Dubai Financial Market’s (DFM’s) rise in 2013 is a case in point. The emirate’s benchmark index points more than doubled when compared with a year ago, driven by optimism over Dubai’s recovery. But part of that lift resulted from euphoria over future growth on the back of events such as the World Expo 2020 win and the upgrade planned by US-based index compiler MSCI for May 2014. 

Growth in previous years also played a role. Dubai became one of the world’s top four performers last year because it had a lot of catching up to do – stocks had been undervalued for years as investors exercised caution while the emirate dealt with the aftermath of the financial crisis.

Compare that with Abu Dhabi on the other hand and it becomes clear Dubai’s stock market rise reflects more than just the emirate’s growth in 2013. Abu Dhabi’s exchange, which tends to mirror the Dubai Financial Market, posted less inflated gains of more than 60 per cent.

Now that the euphoria has brought both exchanges to overbought territory, investors are likely to be slightly less excessive in the year ahead. They will mainly look to companies’ earnings and debt profiles, as well as economic indicators in their stock selection. Non-oil companies in particular are expected to attract investment while Dubai gears up for hosting the Expo 2020, although real estate may attract less attention as signs of a speculative bubble have started to appear.

Global conditions will also continue to impact regional markets. Major trends such as the economic slowdown in China – a major energy importer – and the US’ monetary policy are being felt across the globe, including in the Middle East.

The US Federal Reserve’s scaling back of its stimulus programme in 2014 could have a positive effect on the markets, as a strengthening dollar (indicating economic growth in the US) combined with weakening emerging markets currencies could lead to more interest in the dollar-linked GCC economies.

All in all, company performance rather than speculation and wider economic trends will likely drive the UAE’s stock markets in 2014.