Foreign investors back UAE revaluation and negative interest rates

This week saw another strong rally in UAE stock markets which have been booming since the end of Ramadan.

But analysts at Shuaa Capital told Gulf News that 'most of the purchases are by foreign investors while locals constitute the majority of the sellers. Foreign investors are focused on dirham revaluation, which is why their focus is on companies with dirham-denominated assets.

'Another reason for increasing foreign interest is the easing of fears pertaining to military confrontation between the US and Iran after the latest US intelligence report revealed that Iran has abandoned its nuclear weapons production programme.'

Local sellers

Why then are local stock holders selling out? You really only have to look at the front page of local papers to see why. A new survey from the Dubai Chamber highlighted the problems hitting local business: high rents, higher operating costs, keen competition, bad traffic, high transportation costs and debt collection.

It is not usually a healthy sign in a booming economy when local business is selling out to foreigners. There is always the danger that it is the foreign buyer who is under false illusions and not the local seller.

What if local profits are now coming under pressure? That is surely going to dampen the value of local companies in due course, and a willing foreign buyer will be a very welcome visitor indeed.

Revaluation could therefore be seen as more of a false lure into the market than a genuine cause for investment. Much the same could also be said of negative real interest rates, as the only reason that real interest rates are negative is because of runaway inflation in the UAE, aside from the currency peg to the US dollar which is distorting economic management and artificially inflating the boom.

Foreign buyers

This stage of the investment cycle has been seen many times before in emerging markets. For after the initial boom - which is genuinely fuelled by local business - foreigners will use any stock market set back as a buying opportunity.

At first this is a healthy development as it allows the market to consolidate and to recover some of the ground lost in the initial fall. But market forces will always triumph in the end, and late-cycle foreign buyers seldom get it right, even if supported by a legion of foreign equity analysts new to the market.

In the UAE local equity investors are nervous about a likely imminent oil price correction next year as the US economy slows down, and even the news about Iran removes an element of the geopolitical fear that has been recently supporting speculation in the oil market. Once that speculation goes local stock prices could weaken quickly and look for a new low.

Whether local house prices would follow downwards is another question, as the hot money could move into property from stocks in search of yield and capital gain, and protection against inflation.

See also:
How revaluation would benefit UAE investors
UAE revaluation confusion reigns
GCC summit focus on politics not inflation and revaluation