UAE stock markets enjoy strong start in 2012

After a disastrous last year, the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX) have gotten off to a strong start in 2012. The DFM General Index (DFMGI) has gained 3.87% year-to-date (as of the close of trading of January 26th). The ADXGI has also showed strong momentum since mid-January, and broke even on January 29th. Trading volumes in both indexes are also on the rise.

There are three main factors behind the recent thirst for UAE stocks:

Reason one: stocks lie on the bargain table

The DFM General Index was trading for two months on the lower Bollinger band. Even blue chips such as DFM, Aldar, and Sorouh hit all-time lows in 2011, while price earnings ratios are competitively low. Although the UAE benefitted from the Arab Spring (businesses shifted from North Africa to the UAE, tourists exchanged Sharm el-Sheikh for the beaches of Dubai).

As investor legend Warren Buffet once said: "People usually don't hesitate to buy when goods are lying on the bargain table in the supermarket. Only in stock trading, this is not the case."

Reason two: firms clean-up their balance sheets

While in the heydays UAE conglomerates expanded into all directions, nowadays, they tend to de-invest by selling shareholdings abroad. Recently, global maritime port operator Dubai Ports (DP) World sold its 34% stake in UK-based Tilbury Container Services for $75.48m. After this news DP World shares rose at the NASDAQ Dubai to a six-week high.

Abu Dhabi Commercial Bank or ADCB also felt the effect of decreasing its foreign exposure. ADCB, the UAE's third largest lender by market value, reported that its net profit rose more than seven-fold thanks to its sale of its stake in Malaysia's Berhad Capital for Dhs1.3bn.

Reason three: investors call the crisis a thing of the past

It is of no doubt that the impact of the global financial crisis will be felt throughout the ongoing decade, as U. S. economist Nouriel Roubini said at the World Economic Forum (WEF) in Davos. However, stock prices do not only reflect the performance of the underlying firm's past, but more the expection of how the firm will perform in the future.

Similar to the good January performance at Germany's main stock market Frankfurt, investors have already put to the past crisis "into the folder", as Germans say. They are awaiting the next boom and building up positions.

The rising trading volumes in Dubai and Abu Dhabi serve as proof of this. Last but not least, the probability that index provider MSCI will upgrade the Gulf state to 'emerging market' from 'frontier market' in June 2012 has risen. MSCI postponed its decision on the upgrade in December (for the second time in 2011 after June) to give institutional investors more time to test the new settlement scheme called delivery versus payment.