Is the time ripe to buy GCC stocks?

Trader Ellie has no doubt who is responsible for the current market turmoil. "All these problems come from Europe and America," he told AMEinfo.com, referring to the US downgrade by S&P to 'AA+' from 'AAA'. During the infamous second week of August, the Dubai Financial Market (DFM) nosedived five percent. At all 14 Arab stock markets, $27bn was eradicated within nine days. Globally, the figure totals close to $7trn, that has been lost from equity markets since July 26, according to data compiled by Bloomberg.

"When markets in Frankfurt or New York lose 2%, Dubai falls 3%. Why? I don't know," he adds with an audible sound of resignation in his voice. Ellie, who is of Syrian origin, has been a well-known face at the Dubai Financial Market for years. "At the moment, only three shares provide enough liquidity for trading: Emaar Properties, Arabtec Construction and the DFM itself," he claims. The DMF is the only publicly-listed Arab capital market.

Another close observer of the DFM market is Gary Dugan, the Chief Investment Officer Private Banking at Emirates NBD. Dugan is convinced that the DFM can still fall to low back to the March 2011 low at 1,352 points, representing a 9% downside risk.

Warren Buffet's advice
Ellie is one of the few private traders who still spends time on the DFM floor, based in the Dubai World Trade Center Tower. "People are too afraid to buy stocks these days," he says. He remembers the hey-days from 2002 until 2007 well, when the floor was always crowded.

While the majority are nostalgic about the "good old times", Warren Buffett is optimistic for the future. "I am greedy, when others are fearful." The 'oracle from Omaha', who made a billion by buying value stocks with a constant cash flow over decades (such as Coca Cola, Gillette or 3M), is regarded as the prototype of a contrarian investor.

Looking at the DFM, Ellie's blue chips such as Emaar, Arabtec or DFM are indeed lying on the bargain table. Emaar trades at a 17-month low of around Dhs2.75. The real estate giant's price-to-book value of 0.54 signals that the developer of the Burj Khalifa is a cheap stock. The same applies to Arabtec (0.85). With a ratio of 1.18, the DFM is traded above its book value. DFM shares are a hot bet on whether the UAE will be upgraded to 'emerging market' from 'frontier market' by index provider MSCI.

Those traders who want to enter the market should do so carefully, with small shares of their investment capital. After the dotcom bubble burst in March 2000 for example, speculators jumped on beaten shares like Amazon.com, Lucent or WorldCom. But in fact, these stocks never reached their old highs again. And then there is the frightening example of Japan, whose Nikkei Index has been stuck around 10,000 points for almost two years. The trading rule "buy when markets are low," is not always wise. The global, regional and domestic investment environments have to be taken into account.

Another trap for bargain hunters is "selective examination", meaning investors tend to look at stocks they did once invest in and fail to be aware of new candidates when doing the asset allocation. "Don't fall in love with one stock," an old trading rule says. The DFM with its 60 plus listed shares has more than the three aforementioned securities. "The world continues on a path of changing global leadership," says Emirates NBD's Dugan. "The West is in decline and the East is on the rise." Having said that, more shares will benefit from Dubai's increasing role as the trade hub in the East.

"Markets always come back," says Paul M. Koster, Chief Executive at the Dubai Financial Services Authority (DFSA). "When on October 19th 1987 the Dow Jones Industrial Average Index dived 22%," Koster remembers, "only a tiny futures contract on the day after helped the market moving." But: "1987 will not come back. Globally, most market regulators have implemented mechanisms to prevent indexes from falling into no man's land."