Saudi Tensions Add to Dubai Stock's Worst Year Since 2008

(Bloomberg) -- Traders are running out of reasons to stay in Dubai’s stock market as it heads for its worst year since the 2008 debt crisis.

Dubai’s main equities gauge has lost 19 percent this year, pressured mostly by real-estate developers. The index is now caught between increasing geopolitical woes centering around its neighbor Saudi Arabia and those emanating from global emerging markets.

Saudi Tensions Add to Dubai Stock's Worst Year Since 2008

Saudi Arabia’s main index was up 1.8 percent for the week as of 1:26 p.m. in Riyadh on Wednesday. That followed a slump on Sunday amid the growing diplomatic row over the disappearance of Saudi column-writer Jamal Khashoggi, and analysts speculated that government-related funds were subsequently used to boost the securities. In Dubai, the benchmark is still down 0.5 percent for the week.

The recent events involving Khashoggi’s disappearance, “the strength of the reaction by the U.S., and also the market move, showed we are dealing with a totally different ball game,” said Ami Kemppainen, a money manager at Terra Nova Capital Advisors Ltd. in Dubai. When looking at the spillover effect from emerging-market woes and geopolitical matters in the region, Dubai could be caught “in a double whammy,” he said.

Saudi Arabia understands the need to conclude its investigation into the disappearance of Khashoggi in a timely and rapid fashion, Secretary of State Mike Pompeo said Wednesday.

Low Volumes

Economic activity in the emirate has been lagging as real-estate prices dropped and domestic demand faltered, prompting the government to announce measures to stimulate growth. A Dubai economy tracker index, compiled by Emirates NBD PJSC, showed in September the slowest rate of expansion since April.

“Traditional growth engines of the Dubai economy such as real estate, trade, transport and hospitality, have remained weak this year,” said M.R. Raghu, the head of research at Kuwait Financial Centre SAK, which manages more than $3 billion. “Business sentiment has remained subdued.”

Last month, S&P Global Ratings cut the creditworthiness of the emirate’s utility monopoly and a company that owns properties in the financial center, saying that deteriorating “credit conditions” may affect the ability to provide support to the firms.

Some other metrics of Dubai’s stock market at the moment:

  • The benchmark is down almost 50 percent from a peak in 2014, the year it was added to the emerging markets category by MSCI Inc.
  • The estimated price-to-earnings ratio in the next 12 months was at 7.5x, indicating the market is cheaper than the average for emerging markets and almost every other major benchmark in the Gulf
  • The Dubai Financial Market Insurance sub index is the only one out of nine sector indexes up this year
  • Daily average value of trade in Dubai’s stock market has dropped back to near the level of 2012
Saudi Tensions Add to Dubai Stock's Worst Year Since 2008

Recovery Efforts

But there are signs of hope. The U.A.E. government has been stepping up attempts to foster longer-term growth, which could boost sentiment in the stock market. Last month, it said it would allow foreigners, who comprise the bulk of the population, to obtain extended residency visas after they retire.

The economy is likely to turn a corner next year with Dubai’s Expo 2020 infrastructure projects, changes to visa rules and increased government spending, according to Kuwait Financial Centre’s Raghu.

“Subsequent improvements in the earnings could “prop up the market,” he said.

Dubai’s market “has been a disappointment to investors so far in 2018,” said James Johnstone, the Miami-based co-head of emerging and frontier markets at RWC Partners, which invests in the sheikhdom’s stocks. “However, valuations look very attractive now in property and bank stocks, and I would expect to see the market recover sharply in 2019.”

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