Back in 2010 I was one of the first people to put a buy note out for UAE equities, in the very first issue of my newsletter, which has just filed its final edition. In fact I did more than that – I spoke at a conference to more than a thousand North American investors in Vancouver and told them just to buy and wait for the UAE to recover. I laid out a clear case for an obvious and inevitable upturn in UAE equities that would hugely profit anybody who cared to listen.
A few did, and a few more subscribed to the newsletter. But the inevitable recovery did happen, as inevitable things tend to do if you wait long enough. The Dubai Financial Market actually fell another 20 per cent in 2011 and rose by the same amount in 2012. Only in 2013 did it really motor ahead, doubling in the year, and rocketed up until the middle of last year.
Somebody on the Canadian business television channel BNN kindly asked me to appear on the show last July to tell them where I thought the DFM would go next. Listeners heard me say it was a double-top, and that the market was now on the way down.
Back in Dubai last autumn, that message left me a little unpopular with the companies announcing their plans for IPOs. In my view they had missed the boat. The market was already going down and too weak for IPOs. I recall Daman Securities, whose own IPO is now on the back burner, telling me that they could see local stocks staying up until this May because that would allow the shareholders to collect the bumper dividend payments from the booming profits of last year.
“Sell in May and go away” is an old stock market adage, and that is what we are likely to see when stocks go ex-dividend this year. It actually fits well with the discernible Arabian Gulf business cycle of the long hot summer that tends to depress stock market activity, if only because the major players are in London, Paris or Geneva.
All the same, until May and after Ramadan, which is early in the summer this year, and into the autumn we all need to pay attention to the US Federal Reserve. Let’s see what it does, or more likely does not do, to interest rates.
The Fed chairwoman Janet Yellen’s statement last month was quite a landmark and appeared to mark a back-pedalling on interest rate expectations. If this is confirmed by more weaker-than-expected US economic data there is a strong possibility that interest rates will not go up this year. The Fed has repeatedly said it will be guided by economic data, and if that is bad nothing will happen to interest rates.
Translating that into the UAE equity outlook is not easy, and we can consider several reasonable scenarios rather than trying to dodge this tricky but crucial issue.
First, so far global equity markets have had an easy ride up on low interest rates. If rates are falling, or even static when expected to go up, then this is supportive of equity prices. That is not illogical, as easy money is supportive of company profits. Low interest rates ought to be good for Dubai property developers, for example. One scenario is that UAE stocks rally after Ramadan then move sideways.
Second, we have to allow that the Fed could be tricking everybody with its recent statement. What, after all, is the point of a policy change if you announce it so far in advance that nobody is surprised by it? Say the Fed did the dirty on us and stuck up interest rates in June. You can imagine what that would do to confidence in emerging markets just as the “sell in May” guys began selling. It would be a bloodbath.
Third, we have also to concede that global equity markets, now priced at or close to all-time highs, do have a habit of falling sharply to Earth sooner or later, whatever the interest rate regime. The UAE stock markets’ recent 30 per cent correction may just be a sign of days to come in other markets, and local equities would then fall even further.
Even a hike in oil prices will probably not save the local bourses, as it would be bad news for the global economy and might crash global stock markets, although it would mean a higher bottom into the UAE exchanges.
Peter Cooper is the editor of Arabianmoney.net