Bank liquidity, debt spreads may lift UAE stocks-exec

Bank liquidity, debt spreads may lift UAE stocks-exec

Increased liquidity in the banking system and tightening debt spreads could spark the UAE's moribund equity markets into life and early investors can pick up stocks on the cheap, the chief executive of Dubai's Daman Investments said on Tuesday.

September 14, 2011 12:21 by Reuters

Many investors have given up on UAE markets — trading volumes are poised to slump to a seven-year low in 2011, while Dubai’s index is down 77 percent from a 2008 peak. Abu Dhabi’s measure has lost 50 percent.

“UAE equities today look lethargic. It’s not a pretty picture,” Shehab Gargash, Daman Investments CEO told reporters. “UAE markets have been very badly battered — there’s not much downward space left.”

Gargash says the UAE’s economic foundations are strong enough for equities to revive, with bank deposits and loan growth up 11.5 percent and 2.6 percent respectively in the 12 months to July, although banks are still cautious about lending.

“Banks, whether they like it or not, they have to get active again … (they) will push that liquidity into the system and part of that will go into the equities market,” said Gargash.

“We’re looking at the market generating a cash yield of about 4 percent and in a rising market a big chunk of that will go back into the market itself – it’s all about starting a virtuous circle.

“This will be by no means immediate and will take time. People are asleep as far as equity markets are concerned and the quick risers will be able to catch the better values.”

More robust sentiment and increased institutional trading, both international and local, are needed for equities to rebound, he said, but tightening fixed income spreads may be another indicator that market liquidity will improve.

The UAE economy is forecast to grow 3.7 percent in 2011, according to a Reuters poll in June, but that is not reflected in the stock market because major sectors such as energy, tourism and retail are unlisted.

Instead, real estate dominates the stock market and the sector is mired in a deep correction, with property prices dropping by more than half from 2008 peaks, while a large part of bank lending is also property-related.

In December, influential index complier MSCI will announce whether it will upgrade the UAE to emerging market status.

While the UAE’s weighting is so small – less than 1 percent by most estimates – fund managers could afford to ignore it, Gargash warned, so an upgrade would provide “more of a psychological boost to trading in the region than a real long-term effect”, he said.

With equities downbeat, making money in local stocks has been tough, but Daman’s Second Emirates Fund claims to be the top performing Gulf equity fund, up nearly 6 percent in 2011.

“We had a bigger-than-usual cash portion and we tended to be more focused on the more liquid stocks and dismissed the bear rallies we saw from time to time,” added Gargash. (By Matt Smith, Editing by David Cowell)