Is the UAE stock rally sustainable? (page 1 of 2)

After years of painful negative performance, the Dubai Financial Market gained over 26% during the first two months of this year, triggering hopes for a sustainable boom. The Abu Dhabi market gauge ADXGI has also risen significantly, adding over 8% year-to-date.

As a politically stable and globally connected hub, benefitting from the ongoing turmoil in parts of the Mena region, investors are coming back to the UAE and tourists are flooding the Dubai beaches, rather the coast of Sharm El-Sheikh.

"Recent data shows that occupancy in Dubai was at 86.2% in January. Even more impressive was the revenue per room, which grew at an incredible 26% year-on-year," Gary Dugan, CIO Private Banking at Emirates NBD said in his weekly economic commentary at the end of February. With tourism revenue on the upswing, the Dubai government expects the sheikhdom's economy to rise between 4.5% and 5% in 2012.

Hey-days or "hey, wait!"?

The rapid rise of the UAE markets is reminiscent of 2005, when the Gulf state delivered the world's best equity performances and the IPO mania motivated traders to sleep in front of bank branches in order to get their shares first. However, the index spike, supported by rising trading turnover which reached multi-year highs during the first eight weeks in the year, has triggered different judgments among bankers and analysts.

In a recent report, Talal Touqan, head of equity research at Al Ramz Securities, said: "Some solid fundamental factors are backing the anticipated euphoria. There are forceful cash dividends and high yields, an average that exceeds 5%, recovering corporate results, especially in the property sector, cyclicality, and low return on other asset classes."

While some analysts see the rise in oil prices as a trigger for the stock market rally, others are skeptical that the 'black gold's" rally is the grease for more index advances. US crude advanced 8.5% in February and five percent during the last twelve months.

"The rise in oil prices is good news for GCC economic growth and financial markets," said Dugan. "What strikes me is that all the hallmarks of previous rampant bull markets are in place again. Retail investor interest in the market is high. The recent rally in the equity market seems to have stirred investors to even switch money from their love affair with property to equities."

John Shin, FX Strategist at the global research team at Bank of America Merrill Lynch, explained the current development this way: "Markets have enjoyed the relative comeback in the most recent positive US data, highlighted by a couple of robust good months in payrolls, but oil prices have come back as a growing concern for the macroeconomic outlook. In some sense, the rise in oil prices feels similar to last year, when rising growth expectations were dashed by high oil prices as well."

Shin sees parallels to last year: "Similar to 2011, the most recent surge in oil is not the result of strong demand growth but Middle East supply conditions stemming from tensions about Iran and the Strait of Hormuz, as well as Syria. In this US election year, higher oil and gasoline prices will be a continual focus, potentially dampening sentiment and spending appetite."

ENBD's Dugan: "In our view higher oil prices are here to stay. Much has being made of the potential greater geopolitical risks but the 'high' oil prices are also due to an ongoing fundamental imbalance between supply and demand.