UAE stock markets: Too exhausted for a Year-end party?

It might be too soon to call it a year for 2010, but from a UAE investor's perspective twenty-ten will be remembered as the post-crisis rollercoaster period. The "2010-menu" had all sorts of ingredients that traders fear: from the volcano-ashes to the Euro debt crisis; from a dried-up IPO-market to capital outflows; not to mention the long uncertainty over the restructuring of $24.9bn debt at the Dubai World group, which was eventually settled on September 11 this year. And now a limited war on the Korean peninsula makes the tricky year complete.

UAE recovering from double shock

"The UAE is recovering from a double-shock", says Dr Masood Ahmed, the IMF Director for the Middle East and Central Asia."The demand for oil and the price for oil went down, which affected the oil industry in the UAE. At the same time, asset prices, in particular in real estate went down, which affected the Dubai economy".

As slowly the UAE economy glided into recession, as slowly it finds its way out of it. Traders call periods of no clear direction sideways movements. Private investors prefer clear directions in order to achieve superior returns. They are somewhat missing on the countdown to 2011.

Qatar Exchange posts solid growth

The contrast to competing GCC markets is too obvious. While the Qatar Exchange (QE) gained over 16.21% on a year-to-basis (as of the close of trading on November 14, before Eid holidays started), the DFM (down 6.46%) and the ADX (up 0.19%) are lagging behind.

In addition to the aforementioned external shocks, a number of internal queries prevent the UAE markets from advancing. A UAE insolvency law, which prevents individuals from being jailed when their cheques bounce is yet to be implemented. Also, the UAE has not adapted IFRS as an accounting standard, which is internationally accepted and helps firms to do cross-border business. Corporate governance and transparency standard are overall far behind those in Western countries.

And where has been the long-awaited rebound in the real estate market? Prices continue to fall, putting a burden on the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) likewise. During the last six months Emaar failed to create shareholder value. At the DFM, market bellwether Emaar Properties failed to crack a key resistance at Dhs4, although with a price earnings ratio of 7.80, which is lower than the DFM's real estate's sector PE ratio of 11.80, the share is relatively cheap.

Increased services, logistics demand

Nevertheless there is light at the end of the tunnel. Axiom Telecom's IPO at the Nasdaq Dubai, scheduled for the beginning of December breaks an 18-month "radio silence" at the UAE primary market. Axiom, founded in 1996 by Faisal Al-Bannai, runs some 500 telecom retail outlets in eight countries. Beside the Middle East, the retailer with its iconic orange logo also operates in the UK and India.

"We see increasing demand in the UAE for services and logistics", says the IMF's Dr Ahmed. In fact, shares of logistic provider Aramex, which are listed at the DFM, have surged over 40% during the last six months. Nasdaq Dubai's heavyweight DP World, on the other hand, has been trading sideways since October 24th, after it rallied 50% from July to October. DP World then failed to break the resistance level at $0.60. In the construction sector, contractor Drake and Scull International (DSI) resisted the downturn. Its shares added over four percent during the last six months.

Regarding the DMF and ADX market indices a year-end rally can only occur if investors see better prospects for the coming year and if there are no better alternative investments than stocks.