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Dubai tumble underlines risks in Gulf stock
A plunge in Dubai stocks this week underlined the risks behind the Gulf's equity market rallies, although most analysts do not think Dubai's drop marks the start of any extended downtrend.
March 10, 2012 5:10 by Reuters
The main Dubai index posted its largest drop in over two years on Wednesday as weak global stocks prompted traders to take profits in the emirate. The index lost 4.8 percent to 1,608 points, reducing its gains from a seven-year low hit in mid-January to 24 percent.
Nine Dubai stocks fell more than 9 percent, including property developer Deyaar and Dubai Financial Market .
With stock valuations not expensive historically and Dubai’s economic outlook for this year still positive, many analysts think the market’s uptrend may resume sometime in coming weeks or months.
But gains in the past seven weeks were largely the result of buying by local, speculative investors rather than long-term funds, analysts said. That has left stocks vulnerable to sudden pull-backs.
One example was builder Arabtec, which plunged 9.9 percent on Wednesday ahead of the expected announcement of its 2011 earnings. Traders said the drop was not due to any expectations of poor earnings, but simply because the stock had soared previously as buying by a strategic investor prompted speculators to pile in. On Monday, a bourse filing showed Abu Dhabi’s Aabar Investments, which scrapped a $1.7 billion deal to take a majority stake in Arabtec two years ago, had raised its holding in the company to 5.3 percent.
“The market for the past two days has been very strong on the sell side — we’ve seen some huge profit-taking after six weeks of upside,” says Musa Haddad, head of the regional equities desk at National Bank of Abu Dhabi.
“Dubai found support at 1,600 points, but if there’s more downside it could fall to 1,470 to 1,500 points. I wouldn’t be buying at current levels and would wait to see if the market falls further.” The 200-day moving average, seen as major technical support, is at 1,462 points.
However, Haddad noted that trading volumes were higher when stocks were rising than when they were falling this week, a positive technical signal. “We still have 2,000 as a target for this year.”
Saudi Arabia’s stock market, which is up 15 percent this year and hit a 42-month high this week, has not suffered a significant pull-back. Analysts said it was in a strong uptrend, fuelled by high oil prices and government spending on infrastructure.
However, Dubai’s experience suggests some sectors could be in for sharp pull-backs, if investors decide they have become fully valued and switch into other areas of the market.
One vulnerable sector could be cement, which is up 23 percent so far in 2012. Saudi Cement is trading at 18 times this year’s estimated earnings, while Yamamah Saudi Cement is at 15 times.
Paul Gamble, head of research at Jadwa Investment, said there was still room for gains in the sector because building, construction and cement stocks would benefit from government spending.
“On a valuation basis, a lot of the upside may well be priced into the cement sector, but the outlook is strong,” he said.
However, Loic Pelichet, assistant vice-president for research at NBK Capital, said optimism over cement prices was driven partly by a temporary supply shortage caused by major building projects in and around Mecca, combined with a transportation bottleneck that slowed supplies to the region.
The Ministry of Commerce and Industry has been stepping in to meet local demand for cement with steps including easing import restrictions and pushing factories to work at full capacity. So when the temporary shortage is corrected, upward pressure on prices could fade quickly.
“The market is still 15-20 percent oversupplied…There will be a strong pick-up in production in March and prices will taper off,” Pelichet said.
Another sector that could overextend itself, at least in the short term, is real estate. Some valuations are now quite high; Saudi Real Estate Co shares have been trading at close to 29 times this year’s estimated earnings, analysts said.
Some of the sector’s gains have been prompted by rising land prices, but there has been a speculative element in the rise, said Matthew Green, head of research at property consultants CB Richard Ellis in the United Arab Emirates.
“A lot of the land bank is not being developed and is a tool for trading. There’s definitely been speculation in that and prices have gone up across the board,” he said.
Demand for housing in Saudi Arabia is strong because of a growing population. But property developers in the country may find it hard to exploit that demand with maximum profitability because of the lack of a law facilitating mortgages.
“It’s a build-to-lease market given that income levels are not high (for the middle classes) and there’s no mortgage law in place — that needs to happen to open up the sales market,” Green said. A mortgage law is being prepared by the government and some industry participants think it could be introduced this year, but authorities have not confirmed that.