A good reporting season may be just the tonic the UAE stock market needs to revive its fortunes, and better times could be just around the corner.
This is the view of long-time UAE market watcher Suresh Kumar, general manager of Emirates Financial Services, whose fund management division runs the only UAE stock market mutual funds which foreigners are allowed to own.
‘I am cautiously optimistic about the earnings season,’ he says seated in his comfortable office along the Sheikh Zayed Road in Dubai. ‘This season is usually accompanied by a good level of activity, and usually improves sentiment’.
But Mr Kumar is the first to admit that times have not been good for the UAE stock market recently. Last year the market shed 16% of its market capitalisation, and is down from a peak of 197 points to around 80 points today. The last two years have been dismal indeed for local stock market investors.
‘Our own funds fell by 5-6% last year,’ says Mr Kumar, although readily acknowledging that this is no comfort to those who lost money. ‘Market sentiment is still weak, and volumes are very low, sometimes there is no volume at all’.
Indeed, Mr Kumar notes that a few as a thousand shares changing hands can be enough to move a share price. Why then be cautiously optimistic right now?
‘First, it is a positive step that the financial markets have opened, and that the Dubai Financial Market and Abu Dhabi Securities Market are in place. This is a structural move, and the regulatory framework is also in position. Some might say that the mechanisms still need to evolve further, and that we need all public companies to be listed, but this is still a step in the right direction.
‘Secondly, we can see some greater transparency in the market thanks partly to this new structure, the physical trading floor and its computer systems. What will also help is the enforcement of half-year results’ announcements, and then quarterly results. It is one thing to have a rule, it is another to enforce it’.
Mr Kumar notes that general business trends in 2000 were better than 1999, and that the company reporting season should be able to offer shareholders some good news in the form of better profits and dividends. UAE firms traditionally pay relatively a high dividend and that is another attraction for investors.
But won’t a US recession, and possible further weakness on Wall Street, upset the tentative recovery of the UAE stock market?
‘The US economy does not influence the UAE very much,’ says Mr Kumar. The UAE is not a big exporter to the US like the Asian countries. Indeed, a US downturn might have a positive impact as lower interest rates will follow as the UAE dirham is linked to the US dollar. This tends to be important to local business as it lowers the cost of finance, which is often a significant aspect of many projects despite the depth of equity in this country’.
Surprisingly Mr Kumar is not unduly influenced by the huge increases in oil revenue flowing into the UAE over the past year. He reckons that infrastructure development programmes are already well funded, and that the level of capital expenditure by the government will not rise by that much.
On the other hand, he does agree that oil revenues will increase regional trade and also boost the hospitality sector, as GCC residents take more vacations and international companies look for business.
‘Now is a good time to do some homework before coming back into the market,’ counsels Mr Kumar. ‘In our own portfolios we have already switched into local blue chips with strong dividends, and it may be that the selling in the market is over. We have seen a lot of de-leveraging, but that seems to be finished’.
Foreign investors can buy six mutual funds from Emirates Financial Services, and initial commission is a modest 1%, but only four of the funds invest in the UAE stock market. The only other option for foreign investors wanting to buy into the UAE stock market is to buy shares in Emaar, the partly Dubai Government owned and managed property company.