UAE replaces Kuwait as the second largest regional stock market

Share volumes in the UAE more than tripled in the first quarter of 2008 when compared with the same months of last year. The Dubai Financial Market has reported an increase from $11.7bn to $34.1bn in Q1, while the Abu Dhabi Financial Exchange (ADX) was up from $3.5bn to $20.2bn; the Dubai International Financial Exchange still has low volume.

A report from the Arab Monetary Fund noted that daily trading on the ADX, formerly known as the ADSM, surged from just $57m per day to an average of $325m per day in the first quarter. Trading has been particularly strong in ADX banking and real estate stocks.

That investors should be trading stocks heavily during a period of all-time oil prices is not surprising. But the combined UAE bourses boasted a turnover of $54.3bn in Q1, ousting Kuwait as the second busiest regional bourse which had a turnover of $44.3bn. Saudi Arabia kept the pole position with shares worth $188bn traded in the three months.

Bull points

Analysts said that high liquidity in the UAE, improved stock market regulations, strong local confidence and a renewed influx of foreign investors kept the market lively, and volatility also meant higher trading volumes on the way up and down.

However, the immediate outlook for the bourses is probably a sideways drift with unrest in Lebanon prompting some profit taking, and volumes have taken a downward shift since the hot weather hit.

Still with a string of excellent results from the local banking sector in the bag from the first quarter, there is good reason to think that local stocks will have a lively autumn. Price-to-earnings ratios look very undemanding for an economy in a high growth phase like the UAE, and the high oil price creates an inverse relationship with global stock markets.

Global outlook

Stock market analysts are divided over what a further bout of weakness in global stock markets would mean for the local bourses. Current oil prices mean that the UAE is earning $378m daily from oil revenues or an annualized $138bn, an astonishing boost to liquidity for a relatively small economy.

The downside is inflation which is impacting the operational costs of certain local businesses, albeit growth in revenues normally more than compensates, particularly for real estate and banking.

It is in these two sectors of the UAE bourse that the action is likely to be strongest this autumn with house price inflation roaring ahead and providing super-profits for developers and housing finance offering a new revenue stream to the nation's already well endowed bankers. Kuwait will likely be left behind in the slipstream.