Growth in the UAE’s and Kuwait’s stock markets is expected to slow as investor activity typically winds down during summer - after dividends are distributed - and Ramadan.

Stocks in the UAE and Kuwait rose to record levels from 20 April until 20 May, but trading slowed between 23 and 27 May as stock markets worldwide declined following comments by the US Federal Reserve’s chairman Ben Bernanke, seemingly hinting that the third round of quantitative easing (QE3) could end soon. In addition, China manufacturing data came out weaker than expected.

Fears eased slightly when bullish analysts, some working for the Obama administration, quietly advised institutional investors that QE3 was not coming to an end.

Regionally, stock markets recovered in the week of 27 May, but may drop again in the coming months.

“Markets don’t rise forever and over some of the last trading sessions we’ve witnessed this pull back. We can’t predict what will happen exactly, but it’s possible that the Dubai Financial Market General Index (DFMGI) could retest the 2,200 support level,” says Ramez Merhi, senior vice president at Al-Masah Capital Management. The index stood at 2,321.5 points on 28 May.

“Abu Dhabi and Dubai tend to move together,” he added.

“Kuwait remains the most overbought of the three markets, but also has tended historically to remain overbought for longer periods of time. In any case we would expect some consolidation in the overall market to occur at some time soon.”

Over the past year, the DFMGI and Kuwait Stock Exchange Index rose more than 40 per cent, while the Abu Dhabi Securities Exchange General Index (ADXGI) climbed more than 30 per cent.

Three-quarters of the DFMGI’s upwards performance was due to the top five stocks by index weighting, which combined represent around 62 per cent of the index. The Abu Dhabi exchange’s five top stocks, making up 65 per cent of its offering, also accounted for the majority of its climb. The Kuwaiti stock market, on the other hand, is more diversified, with the five top stocks representing less than a fifth - 17 per cent - of the total weight.

“The UAE was unique in the sense that valuations were still quite cheap with many stocks having prices below their per share book values. But with all the progress being made with Dubai’s debt restructuring, with booming tourism and [a] recovering real estate market, a vote of confidence returned to the markets and investors began to bid up the undervalued stocks.

“It’s possible we see a catch-up play with regards to Qatar and Saudi, but probably not with the same force as the UAE exhibited since it was rising from a relatively lower valuation base,” says Merhi.

The DFMGI currently trades slightly below book value, with a price-to-book ratio of 0.92. It only traded above 1 in the third quarter of 2008, while its lowest value - 0.62 - was registered in the last quarter of 2011. The ADXGI currently has a 1.25 price-to-book ratio, after reaching a low of 0.99 in the last quarter of 2012.