Euphoric small investors let Dubai bourse defy gravity
Dubai, April 28, 2014
By Azza Al Arabi
A sense of euphoria can be felt as you walk onto the Dubai Financial Market's (DFM) trading floor. Excited investors sit huddled at tables, eyes fixed on trading screens. Occasionally the floor erupts in applause as certain stocks shoot up to target levels.
A local investor in his fifties who gives his name as Abu Hany, dressed in the traditional white robes of the Gulf, describes himself as essentially a short-term trader - like many of the customers in the room.
"Most of my investments are hit-and-run. This is my investment strategy."
But he also shows little inclination to take money off the table for any extended period; profits he makes from selling one stock are quickly ploughed into buying another.
Abu Hany's strategy helps to explain the extraordinary strength of Dubai's stock market. He and thousands of other individual investors - most of them United Arab Emirates citizens, but some of them from other rich Gulf countries such as Saudi Arabia and Kuwait - have made Dubai the world's best-performing major stock market this year.
Flush with cash from the Gulf's economic boom and inspired by some impressive corporate success stories, they have pushed the emirate's main stock index up 50 percent so far in 2014 after it more than doubled last year.
Many professional fund managers and analysts are starting to worry that the market may be overheating; some have been predicting a pull-back for months. But the flood of money from retail investors has pushed the index up almost without interruption for 18 months, and as long as people like Abu Hany keep their confidence, the uptrend may well continue.
"Our markets and economy are strong and I believe that Dubai is the ideal environment for investors," Abu Hany said this week. If there is a market pull-back, he added, "I believe that it will be minimal."
When the Dubai market started its ascent at the beginning of 2012, it was cheap. By some measures, that is no longer the case; analysts estimate the market is trading at about 19 times estimated earnings for 2014, compared to about 10 times for MSCI's emerging markets index.
For many institutional investors, that means the risk/reward ratio has changed for the worse - so regardless of how optimistic one is about the long-term outlook for Dubai's trade- and tourism-fuelled economy, the bull run should soon pause.
"It is hot and there is nothing to fuel the heat apart from high hopes, some of which are about to be dashed," Sanyalak Manibhandu, manager of research at major brokerage NBAD Securities, said last week.
But such misgivings are having little impact on share prices because of the structure of the Dubai market. Retail investors account for some 60 to 70 percent of daily trading, analysts estimate, compared to levels well below 50 percent for many other stock markets around the world.
That makes retail players more powerful than institutional investors in dictating day-to-day market moves. Their presence can be seen in a roughly threefold leap in trading volume on the DFM in the past year, to levels last seen in 2009.
It could also be seen in this month's response to an initial public offer of shares in Dubai, the first IPO on the DFM since the emirate's financial crisis froze primary market issuance five years ago.
Marka, a "cash shell" being set up by prominent local businessmen, does not have any current operations and investors were asked to commit money on the basis of a general plan for the company to open fashion retail outlets, restaurants and cafes across the Gulf in coming years.
But the IPO was designed to appeal to retail investors - shares were sold through a wide network of subscription banks - and the 275 million dirham ($75 million) offer, representing 55 percent of Marka's capital, was a massive 36 times subscribed.
Leverage played a big role during the last big retail investor-led booms in Dubai's stock market, in 2005 and 2008. This time, many investors claim they are more cautious.
"In 2008, I invested in a fund through a bank in the UAE. I leveraged four times my capital and after five years, I lost more than half of my total investment - and I was unable to repay the bank," said another customer at the DFM this week.
"This has taught me not to invest through margin lending."
But leverage is clearly a significant factor in the current bull run. The number of accredited margin trading providers at the DFM has increased by seven to 18, the bourse said in its first-quarter report.
Retail investors' optimism appears to be built mainly on three pillars. One is the strong momentum behind the Dubai economy's recovery from its 2009 crisis; gross domestic product is growing at a rate of 4 percent or more, and residential property prices were up by about a third from a year earlier in the first quarter of 2014.
With real estate prices in some areas nearing their pre-crisis peaks, some investors argue that the stock market index, now just above 5,000 points, is heading for its record high of 8,545 points, hit in 2005. Qatar's market regained its 2005 peak last week.
Many individual investors cite Dubai's success last November in winning the right to host the World Expo in 2020, an event promoted by the government as a big boost to the emirate's development - though some private analysts say the scale of the long-term benefits is not clear.
"Analysts give excuses for the rise and fall of the index, but I think that the Expo 2020 and the government's vision are supporting the market," said a third investor. He came to the DFM with his son, who also plays the stock market.
"We local investors have a long-term view of the economy."
The second pillar is international equity index compiler MSCI's plan to upgrade the UAE to emerging market from frontier market status at the end of May, which will put Dubai on the map for more foreign fund managers.
Expectations for the boost from this factor may well be overblown; fund managers calculate Dubai might draw between $1 billion and $2 billion of new foreign money, not much compared to the market's $93 billion capitalisation - and a lot of the new money has already arrived.
But if the first two pillars weaken, retail investors have a third pillar to sustain them: a dramatic improvement in the outlook for some individual local firms, thanks to the region's economic boom and in some cases, support from UAE authorities.
Last year, for example, Abu Dhabi state fund Aabar increased its management control of Dubai builder Arabtec. Since then, Arabtec has launched an international expansion drive, winning among other contracts a $40 billion deal - backed by both the UAE and Egyptian governments - to build one million homes in Egypt.
That deal alone is worth over five times Arabtec's entire 2012 revenues; more contracts related to Aabar and the Abu Dhabi government are in the pipeline. Arabtec's share price has more than tripled so far this year.
Many fund managers, noting that Arabtec may struggle to manage such a fast expansion and translate its huge deals into concrete profits, have become sceptical of the stock at its current level of 8.84 dirhams. Five of a sample of 12 analysts now have some form of sell rating on it, against only three rating it a buy, according to Thomson Reuters data.
Many retail investors, however, say they take the announcements of corporate deals at face value.
"If the size of one contract is $40 billion, I am not surprised at Arabtec's share price performance and I expect the stock to reach 10 dirhams by the end of May," Abu Hany said.
If faith in Arabtec falters, there are other high-flying stocks to lure retail investors. State-backed Emaar Properties , Dubai's largest listed real estate developer, saw its first-quarter net profit jump 55 percent and last week predicted profit would quadruple by 2018.
Of a sample of 14 analysts rating Emaar, 11 still give it some form of buy rating and none view it as a sell.
A fourth retail investor at the DFM said he felt Arabtec was indeed overvalued, and that the Dubai index would drop as much as 5 to 7 percent in the next six weeks. But this prospect did not change his bullish overall view of the market, he added.
"The market is fairly valued and that is the reason I am invested. Dubai has got a lot of potential to rise. On that basis, I am satisfied," he said. - Reuters