UAE shares decline as sell-off in China spreads fears of financial contagion

UAE stocks fell yesterday as a sharp sell-off of Chinese equities began to spread to markets around the world, raising the spectre of financial contagion.

The fate of Greece in the euro zone remained undecided, adding to an increasingly long list of investing woes.

The Abu Dhabi Securities Market General Index slipped 0.68 per cent to 4,692.29, while the Dubai Financial Market Index fell 1.36 per cent to 3,986.6, its lowest level since May 31.

The Dubai market’s fall below the 4,000-point level might hit short-term traders and spark further sell-offs, said traders.

The Shanghai Composite Index, which fell 5.9 per cent yesterday, was down 32 per cent for the past month, even after Chinese authorities tried to stem the market turmoil.

“For Dubai especially we saw that it’s below the 4,000 level, so that added to the pressure, especially for the short-term traders,” said Hani Konquar, a senior equity sales trader at Mubasher Financial Services.

“In the next few days, the global market scenario will continue to have an impact in the very short term because the Greece story still hasn’t been resolved.”

Prices of commodities, including oil, remained volatile, adding to the worries of investors in the Arabian Gulf.

Brent crude dropped as much as 1.7 per cent yesterday before rebounding 0.6 per cent after UAE markets closed.

Countries in the region are heavily reliant on oil revenues. In the UAE, local shares have yet to fully recover from the drubbing in the fourth quarter last year when oil prices fell about 30 per cent.

Chinese stocks continued to slide even though authorities in the world’s second-largest economy sought to stem the sell-off. They introduced measures such as getting state-run firms to buy equities, allowing companies to halt trading in their shares, and preventing investors with equity stakes of more than 5 per cent to sell in the next six months.

The sell-off in the past month has wiped more than US$3.2 trillion off Chinese stocks, and follows a huge rally that many observers said was speculative and not based on reasonable expectations of economic growth.

Nevertheless, the Shanghai Composite Index is still up 8.4 per cent so far this year. The index had more than doubled in the 12 months leading up to the crash, partly bolstered by investors borrowing money to buy stocks.

“China is the biggest emerging market in terms of financial indexes,” said Simon Kitchen, an investment strategist at EFG-Hermes, an investment bank based in Cairo.

“The volatility that you are seeing in China and the fact that you are seeing a lot of stocks being suspended means that a lot of emerging markets investors may be feeling risk-averse.

“This is being transmitted to our markets, particularly Dubai, which is highly correlated to the emerging market index.”

However, Kinger Lau, a China strategist at Goldman Sachs in Hong Kong, predicts that the CSI 300 China Index will rally 27 per cent next year as Beijing acts to shore up investor confidence and lowers interest rates.

“It’s not in a bubble yet. China’s government has a lot of tools to support the market,” said Mr Lau.

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