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Bankers bullish despite market correction

DESPITE several market corrections in two of the Gulf’s strongest stock exchanges, a leading Dubai based investment bank remains bullish on the prospects of growth in the region.

DESPITE several market corrections in two of the Gulf’s strongest stock exchanges, a leading Dubai based investment bank remains bullish on the prospects of growth in the region.

Both the Tadawul All Share Index and the Dubai Financial Market whose combined market cap is US$615 billion were down by some 6% over the past fortnight. In Dubai alone, the decline was approximately US$10.9 billion, as investors cashed in on their profits in the advent of second quarter company earnings.

Joe Kawkabani, a senior fund manager at Shuaa Capital, a Dubai-based investment bank, said the market retreat in Dubai was the result of investors cashing in on their shares in real estate giant Emaar Properties. The company accounts for 70% of the Dubai stock exchange.

“It’s because of one word — Emaar,” Kawkabani told Arabian Business. “We are waiting for [Emaar’s] second quarter results... The expectations in the market are very high — unreasonably high I would say. The company achieved US$354 million in the first quarter and surprised everyone, where the expectations were US$190 million per quarter,” he explained

The fund manager said as a result of buoyant first quarter results and higher expectations, many investors were anticipating results in the range of US$463 million to US$517 million in each of the remaining three quarters.

But Kawkabani also said that an important issue was Emaar Properties’ intention to double its capital to US$1.5 billion dirhams through a 1:1 rights issue and raise the limit on foreign ownership in the capital of Emaar to 49%.

“The big question then is what is the premium going to be for doubling the capital? Its still an unanswered question,” said Kawkabani.

“The market now is going through a big two fold test: in earnings related to the first two quarters, but the results are excellent, banks are achieving 100% growth. On the other hand you have the liquidity test,” explained Kawkabani, adding, “You have over US$10 billion of capital increases. This is what is triggering the overall sell off.”

But the Dubai Financial Market rebounded the next day by some 3%. Kawkabani attributes this to the fact that there is nothing major or fundamentally wrong with the market. “If the sell off is intense or a little bit irrational you will see investors jumping in and buying back,” said Kawkabani.

The banking, real estate and cement sectors will benefit, said Kawkabani. Emaar properties will see its stock rally because of short-term exceptional growth rates, added Kawkabani with record performance in 2005.

“Next quarter they will start recognising Burj Dubai sales. The more they build the more they can recognise revenues. This will be an additional revenue stream for them,” explained Kawkabani.

The real estate giant may also realise additional revenue, if market rumours that it intends to sell 70% of Dubai Bank to Dubai Holding are true. Then there is the question of how the company will utilise some US$4 billion if it succeeds in doubling its capital.

Kawkabani brushed off concern brought on by a research report from Japanese investment Bank Nomura.

Tarek Fadlallah of Nomura and author of: “The Great Arabian Bubble” and “The Credibility Gap” reports, previously said markets in the Gulf are overvalued. He added that it was becoming increasingly difficult to rationalise the disproportionate valuations of companies, making it all the more certain that if a market correction takes place in the region’s most capitalised market, it would be both “both sharp and painful”.

“The mismatch in performance between profits and the stock market has led to valuations to expand just at the point in cycle when they ought to be compressing in anticipation of slowing growth,” Fadlallah wrote.

He later told Arabian Business: “It seems rather strange that you have a situation where the oil sector, which is what Saudi Arabia is all about, is unlisted and major companies are also largely unlisted — and despite that other companies that are listed still account for 150% of the GDP of Saudi Arabia.”

Though Kawkabani does not agree entirely with Fadlallah, he does concede that some markets are overvalued. The fund manager said the present situation should be viewed in the context of the environment, the prevailing interest rates, current oil revenues, budget surpluses and growth rates. He cited that some companies in the UAE are growing at more than 100% with Dubai Investments growing at 400%.

“We are cautiously bullish,” said Kawkabani, adding Arab markets would continue to do well in the short to medium term. “We are going to go through corrections, we are going to be volatile, but over the long term we’re bullish; a bubble has nothing inside, it is full of air. This has fundamental growth, a lot of liquidity.”

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