Don’t believe the hype

Forecasters in the markets have a habit of getting it wrong, often deliberately, writes Stephen Corley

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By  Stephen Corley Published  September 24, 2006

|~||~||~|Forecasters in the markets have a habit of getting it wrong, often deliberately, writes Stephen Corley The safest way to double your money is to fold it and put it in your pocket. At least that is what my father told me. Obviously he never visited the UAE, where despite repeated warnings and a near catastrophic downturn in the markets, investors continue to believe with a choreographed inevitability that easy money is to be made from local shares. After peaking last year at values that had more to do with the realms of astrology than fundamental analysis, analysts and brokers are out in force once more with an enticing bag of predictions and forecasts to whet the appetite of profit-starved investors. It seems to have worked as the long hoped for positive trend in regional bourses started in earnest at the beginning of the month. Unfortunately once again the lunatic progress made by some stocks, typically in the absence of any major news to justify such a move, makes the scenario frighteningly reminiscent of last year’s shenanigans. Here in the UAE we have two classes of forecasters: Those who don’t know--and those who don’t know they don’t know. Otherwise it wouldn’t be possible to justify the madcap predictions of many. Forecasting that the DFM could wipe out all its previous losses by year-end or that Emaar is undervalued by around 45% are statements obviously intended to massage interest and get a rally going. However, buying has to come from a sustainable base built on fundamentals, not the speculation of recent years, otherwise the lessons were for nothing. There are a few companies likely to provide stellar growth and profits this coming year. Overall though, the DFM trades at a trailing price-earnings multiple of 16.25, hardly a bargain. And so, a few weeks ago, according to a report produced by a leading GCC investment bank, fair value for shares in Emaar Properties is Dhs 18.74, meaning that shares in the leading developer, which stood at Dhs13.10 at the time the report was written, were undervalued by a whopping 44.5 per cent. The report’s co-author, said that the revaluation was based on redefining Emaar in light of its international acquisitions and joint ventures. The analysts are entitled to their theory, although it’s specious, given the report did not address the very real concern that Emaar bought in at what most commentators agree looks like the peak in the market. Housing starts in the US fell by 6% last month alone. This kind of blatant share ramping is exactly the kind of thing that should have been left behind, together with the shirts of thousands of investors as the market plummeted from its peaks. The essential requirement that few seem to grasp is that in addition to structure, transparency and regulation, the financial markets need critical mass and that means foreigners. Foreign asset managers, foreign banks, foreign insurance companies and foreign involvement in and on the capital markets. No western fund manager is going to invest in a market that drives prices up on a whim by 30% plus. If they do, then they are going to require at least some form of hedging mechanism to even out the odds somewhat. Technical analysis as they say, is the art of drawing a crooked line from an unproved assumption to a foregone conclusion. Which may also explain the odd performance of Tamweel. There are still no obvious reasons for a rally that took the stock up 32% in four sessions, even if its closest rival, Amlak, trades at 80 times earnings. A technical rerating doesn’t justify this kind of response and so we are left to wonder what news has been coming from the Majlis. The Emirates Securities and Commodities Authority (Esca) has been active recently in fining those who don’t comply with the reporting requirements laid down by the DFM. Frankly they should go further and investigate what is behind sudden price movements such as those we have seen. Whilst calls to merge both the ADSM and DFM into one entity are absolutely the right idea, further measures to protect investors need to be introduced as soon as possible. As we go to press, the market seems engaged in a bout of pre Ramadan profit booking. However, 32% of the total shares of Tamweel were traded in two days, a fact, analysts say indicates further substantial increases in the future. A fact most of us say, reeks of something else. - Stephen Corley is a business consultant. ||**||

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