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What’s spooked the markets?

What’s spooked the markets?

The numbers in the local exchanges took a hit this week after a series of unwelcome company announcements. Here’s the news and why it mattered.

January 12, 2011 4:22 by

Kipp is scared of just three things: snakes, hard boiled eggs, and fish looking at us. Investors, it seems, are scared of all sorts of things, as evidenced by this week’s downturn in the local stock exchanges. The negative sentiment, seen most seriously on Tuesday, has been provoked by news emanating from various companies in the UAE that investors didn’t want to hear. They’re probably all hiding under the duvet right now.

So what were the companies and what was the news? It mainly revolves around two big real estate related entities near the front of the phone book. Here are the key details:

Arabtec – News that Arabtec has been awarded a big new contract (for building the Al Baraka Banking HQ) was not enough to stop shares falling after the Dubai-based builder announced it is calling a shareholders’ meeting to seek approval to raise capital through a rights issue and sale of debt. According to Emirates 24-7 the meeting will consider an issue of 398.67 million shares at Dh1 a share to existing shareholders and the sale of $150 million worth of convertible bonds. The result was a 3 percent fall in share value for the company.

Aldar Properties – Another company trying to raise funds, Aldar said on Tuesday that it is considering a convertible bond issue as well as asset sales in a bid to handle upcoming debt repayments, and may call an extraordinary general meeting to approve the moves. According to the FT, the assets and bond are expected to go to the government, which will also increase its stake in the company through the conversion of another bond held by Mubadala, the sovereign investment outfit. This is big news for shareholders – and not the good kind – as it means a potentially significant dilution of the value of their shares. Shares fell 4.6 percent. An analyst speaking to the FT said the extraordinary general meeting could be “a bloodbath.” But ultimately investors won’t have much choice – the company’s very survival will be in doubt without an infusion of cash.

As explained, this news has led a general negative feeling in the markets, translating to a slump in prices. On Tuesday the Dubai Financial Market closed down 1.5 percent, the Abu Dhabi Securities Exchange closed down 0.5 percent; small potatoes, maybe, but in markets already on their knees every blow to recovery is felt. At the time of writing the two companies, Aldar and Arabtec, were extending their drop on Wednesday.

Don’t panic, however – we’ve seen much worse than this. It’s just a case of the jitters. But you don’t need Kipp to tell you why all this matters. Unlike pretend news affecting the share prices (such as the National’s report that Etisalat and Du were running tests), or inconsequential news (Arabtec’s Riad Kamal getting a slap on the wrist and a personal trading ban), the news coming from these companies does actually reflect their viability. It (rightfully) immediately provokes a market response, and even if you’re not a trader it matters because the consequences filter down to the real economy we all operate in. Companies can’t invest in new projects, can’t hire new staff, or they might lay people off – that kind of thing affects us in the real world.

Investors need to toughen up, if you ask Kipp – the rollercoaster may be slowing down, but it’s still got a few ups and downs before we’re all safely back on terra firma. We need cool heads and calm hands to help get us all through.

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