Stocks on the Rocks

Last week saw the Dubai Financial Market plunge to its lowest level for two years, with other bourses in the region also falling. Yet whilst experts still claim it is just a “correction”, Alexandra Dubsky and Anil Bhoyrul explore just how low the markets could go.

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By  Alexandra Dubsky Published  November 26, 2006

|~|Abu-Dhabi-Stock-Market-200.jpg|~|GOING DOWN: Stock markets across the Gulf have plunged, with the DFM now at its lowest level in two years.|~|Last week saw the Dubai Financial Market plunge to its lowest level for two years, with other bourses in the region also falling. Yet whilst experts still claim it is just a “correction”, Alexandra Dubsky and Anil Bhoyrul explore just how low the markets could go. Abdullah Latif liked to take risks. Every evening at 5pm, he and three friends would head to the Saudi stock market in Riyadh, with an average of US$1000 each. They would chose their favourite companies, invest their cash and watch as the share prices either rose or fell. It made for regular, if not always cheap, entertainment. “We were enjoying ourselves. We were doing no-one any harm,” says Latif. Or so he thought. Last week, the Saudi authorities brought an end to evening trading in the Tadawul, effectively banning it. They claimed that the likes of Latif were unsophisticated stock market players, who did nothing but distort the market value of shares. What the Tadawul needed was mature, daytime, professional investors. The effects of the Saudi decision, seemingly trivial at the time, are now being felt Gulf-wide. With Latif and thousands of other casual investors no longer playing the markets, volumes of trades quickly shrank, market confidence sank and share prices stank. The Dubai Financial Market is now at a two-year low, having collapsed by 64% this year alone. “I thought that this is the lowest point the market can reach but you never know. As we see in Saudi Arabia the market is very volatile and anything can happen,” says Seif Fikry, head of the UAE unit of brokerage EFG-Hermes. It isn’t just Dubai that is suffering. Abu Dhabi stocks slid last week another 0.43% to close at their lowest point since January 3, 2005. Saudi Arabia’s stock market has collapsed by 18.4% since October 28th this year, and is now running at 49% down over the past year. Doha’s stock market is 42% down on the year, having lost another 3.3% in the past week, while Kuwaiti stocks are 12% lower than a year ago – after a 2.21% slide last week. Wherever you go, wherever you look, the only way appears to be down. “We are back to the rates of 2004, and the market will lose another 1% or 2% in the next days. The market is so weak, so low, it won’t hold at its current level. The big guys, the big portfolios that move this market, don’t buy because they think that the market will decline further,” says Sufian Easa, an independent stockbroker at the DIFX. Most experts point the finger solidly at Saudi Arabia, saying that the ban on evening trading sparked off a ripple effect, worsened by regional tensions over Iran, a likely fall in oil prices and the lower than expected earnings of some of the big companies. And it appears no one is safe. Last Tuesday, the Hariri-controlled Oger Group dramatically canned its planned US$1.25 bn flotation on the Dubai International Financial Exchange, just hours before trading on its shares was due to start. VIP guests and media, invited to a glittering share listing ceremony, were being frantically sent text messages and emails telling them not to bother. Oger certainly wasn’t going to bother putting itself at the mercy of the markets. The company – which provides services in Jordan, Lebanon, Saudi Arabia and Turkey – had previously announced that it would offer US$1.25bn in shares on the DIFX and in Global Depository Receipts (GDRs) listed on the London Stock Exchange. It was expected that Oger would offer shares at between US$1.15 and US$1.42, and GDRs - each representing ten shares - at between US$11.50 and US$14.20. The float would have valued the company at up to US$8bn. The decision to pull the listings was made last Tuesday, just three hours before the company was due to announce a date for the IPO in a statement to the London Stock Exchange. A press conference scheduled for last week in Dubai was also cancelled. Oger Telecom blamed ‘regional volatility’ as the reason behind the decision in a statement made last week. “Despite over-subscription throughout the price range, with good support from investors in the Middle East, in the light of increasingly challenging and volatile regional market conditions, the Company and principal selling shareholders deemed that it was no longer advisable to proceed," the company said. The real concern now is what value the market will put on some of the biggest players. Take Emaar, where despite profits of over US$1bn, its shares are sitting at US$2.99 each. Last spring, they touched the US$7.9 mark. New telecoms operator du fell 2.79% last week, while lesser known companies took the greatest hit. The Dubai National Insurance Company saw a 4.8% crash in the week, and is now trading at levels 55% less than a year ago. DIFX broker Easa is hardly optimistic about the future, explaining: “I think Emaar will go down to US$2.17, that is the level people now assume. Du is also going down because the company will not launch before next year so people do not want to buy the shares now.” He adds: “This crash is however not a real crash because it is still part of the market correction. We had real prices in 2004 - this is how much these shares are worth. Everything above that was virtual, and now we are coming back to the real prices. This is still part of the market correction. But the market will continue to decline, and will lose another 25% of value or so. This phase will continue for up to 12 months according to technical analyses, this is how long it can take to recover. And it will go up again step-by-step, not all of a sudden. Prices will never go back to the level of 2005 and beginning of 2006, it will take the market 2 to 3 years to get back to this level.” The pulling of the Oger float, and the oversubscription of the DFM’s own listing has drained liquidity, but some analysts remain confident that they have seen the very worst. “The market has reached an almost two-year low, but we think the market will hold at this level and won’t go down further. The recovery of the market will not happen before Q1 2007. Investors now should build a portfolio slowly and choose wisely since there are cheap shares now all over the place. They should look for the fundamentals, it is a good time to build a portfolio now, and bargain hunters should be there,” says Diya Musa, general manager at Shaheen Financial Brokerage. Musa adds that, particularly in Dubai, there is still cash to be made from stocks: “Du will be a good position in the future, it will end the monopoly of Etisalat, and from the past and the developments in other markets we can see that telecom operators normally do well. The market crashed because in the last six months evaluations were high, also there was high liquidity in the market, then interest rates got higher than last year, so less people could borrow from the banks. Another aspect is that banks force their debtors to sell if the market goes down so if it goes down little many investors are forced to sell." He adds: "I do not agree that the Saudi market triggered this low, the market and companies there are different, developments there have nothing to do with our fundamentals, this is just a psychological link that might affect smaller investors.” Companies affected by the falls are, for now at least, holding their nerve. One firm in Saudi Arabia, Al Baha Development, plunged 48% in the space of a week, but officials say it was a single sell-off that triggered the collapse and expect the price to rise just as fast. At Emaar, chairman Mohammed Alabbar has told friends that he is not worried by the drop, confident that any market correction will not affect the company in the long term. This, despite seeing Emaar’s market value stand at US$19.5bn, nearly half of that a year ago. Earlier this year, Alabbar told Arabian Business: “I’m not worried but I carry it in my heart. I feel for them [the shareholders], not because the company is not doing well, but there are market forces in the region that are beyond our control. There is greed that is beyond our control, and that’s human nature. I do feel for them. I know it’s not my responsibility because I can’t control the market forces. During the dotcom boom, New York taxi drivers were doing the same thing. When greed comes in during the boom time, you get the educated guy who will analyse everything. Then you get a lot of guys who are also participating but not at that level. Ignorance is a big issue, but don’t underestimate greed.” His counterpart at Etisalat, Mohammed Omran, has probably also had a few sleepless nights, as his share price fell 1.12% last week. Over the past year, it has lost a fifth of its market value. Last week though, Omran was keeping his cool, telling Arabian Business: “This is the market changing and the share price of companies changes accordingly. We cannot affect it. What is important is that the fundamentals of our business remain strong, and we carry on doing what we are doing.” While the likes of Omran and Alabbar keep on watching the dealing screens for better news, some analysts are certain they can do nothing but wait for more news from Saudi Arabia. “The whole situation is because of Saudi Arabia shaking up the confidence of all markets in the region. Any market in the region is affected by Saudi Arabia since they are the biggest. Saudi Arabia started the correction and all followed. Now they are all down, even the Egyptian one, because of Saudi Arabia. Investors should hold on to their portfolio or even add to it, since now rates are low. The economic situation in the UAE is very positive, so the market will recover,” says EFG-Hermes’s Seif Fikry. As the weekend approached, tensions in the region’s stock markets remained high – though an uneasy calm seemed to be spreading. Trading in Dubai on Wednesday was worth less than US$60m. Still, it seems, nobody can quite work out what is going on. “The economy is doing well, oil prices are high, and the listed companies are showing great results, but still the market is down. I don’t see why shares should not go back to their level of 2005. But it might take two years or so,” says Majdi Mansour, the CEO of Rasmala Brokerage. Yet most investors, it seems, would argue that Mansour is being wildly optimistic.||**||

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