Volatile outlook for UAE stocks in 2008

At the moment of writing the DFM has just past the 6,000 barrier, still quite a way short of its previous all-time high while the ADSM is closer still to making good this distance.

In the boom-slump pattern of emerging stock markets a strong rally after a crash is often seen: often too it is foreign investors that lead the charge, having missed out on the previous boom and not wanting to miss this particular boat.

The trouble for UAE chartists is that emerging market rallies after a big sell-off are seldom, if ever, maintained. Normally there is a second shock and another big sell-off until a true market bottom is found.

And by then most participants have either lost their capital or given up. It then takes several years before anybody really has the nerve to invest in the market again. It may of course be different this time.

New era

There is an argument that the UAE has entered a new golden age, a new era of prosperity. Certainly with super high oil prices and massive domestic investment in real estate and infrastructure anybody could be forgiven for making this conclusion.

However, again the concept of a 'new era' that dramatically changes the normal investment rules is something that old hands in stock markets have seen many times before. Usually the 'new era' just turns out to be a lot of over-inflated expectations concealing huge debt and unsustainable business models.

What generally happens is that some new event occurs to challenge the optimism of the stock market rally. The most obvious cloud on the horizon for the UAE is a global economic slowdown or recession resulting in a sharply lower oil price that dampens hydrocarbon revenues.

Oil price hit

The UAE stock market would not like this one little bit. Therefore, while annual company results in early 2008 are likely to support still higher stock prices - and the market price-to-earnings ratio of 12 is cheap by any standards - watch out for a sudden setback.

This could happen very quickly and come quite out of the blue. The warning signs are very plain: Wall Street is currently sustaining a stock market valuation level that seems entirely unjustified by the mounting sub-prime crisis, ongoing credit crunch and tumbling house prices.

If this picture cracks - and wiser heads in the market think it must - then the UAE stock market rally will be over and the market could revert to the more typical pattern that follows a big crash like the one seen so recently in 2006. Then a late year-end rally would be the best we could hope expect as an end to a volatile year.

See also:
2008 outlook for currencies, stocks and commodities
Investment themes for 2008