UAE stock gains top region, but oil price and US interest rates cloud the outlook

US interest rates and the price of oil are among factors that will sway UAE stock markets in the year’s second quarter, after a turbulent first three months in which the exchanges overcame a rough start to post the best performance in the region.

The Dubai Financial Market General Index ended the quarter up 6.5 per cent, the best performer out of all Arabian Gulf markets. The Abu Dhabi Securities Exchange General Index gained 1.9 per cent.

In contrast, the Saudi Tadawul index was the worst performing Gulf market, with a 9.9 per cent drop in the first quarter.

“The first quarter in general was a tough quarter for the market, especially in January,” said Mohammed Yasin, the head of NBAD Securities in Abu Dhabi.

At the same time, performance in the first quarter was buoyed by a number of factors that will not be repeated in the coming quarter. The inclusion of Etisalat in the MSCI Emerging Markets Index helped bring liquidity into the market. Also, the 2015 dividends distributed by UAE companies in the first quarter were generous, particularly those from banks.

“Investors will be a bit cautious before first quarter results and, I suspect, some of them will probably book some profit after the strong market rebound [in February and March],” said Sebastian Henin, the head of asset management at the The National Investor in Abu Dhabi.

“If you take a longer view for the coming six to five months, we have some interesting catalysts, such as the Iranian story and Expo 2020, that might have some impact on key sectors of the economy, such as real estate, consumption etc., which had suffered a bit recently due to the general slowdown across the GCC markets, but also due to the strength of the local currency.”

Further, UAE banks, which were flush with government deposits before the oil price dip, are now suffering from tighter liquidity that will effect their performance. Deposit growth at UAE banks is likely to slow this year to 3 per cent from 10 per cent annually between 2012 and 2014, Moody’s said in a report last month.

“The coming period will pose a lot of challenges. Particularly economic factors show that there was a slowdown, especially in the banking sector, in credit growth, in addition to the real estate sector and consumer spending,” said Talal Toukan, the head of research at Abu Dhabi-based brokerage Al Ramz Capital. “The performance of the market will depend on the oil price and the strength of the dollar.”

Mr Yasin said that when the banks post their first-quarter results, these are unlikely to exceed the year-earlier numbers.

“Banks will have to compete to try to attract new deposits and, therefore, the growth will be challenging,” Mr Yasin said. “We think for the first quarter of 2016 most of the banks will probably be matching at best the first quarter results of 2015, but probably will be lower – for many of them – than the fourth quarter of 2015.”

The international oil benchmark Brent rebounded by 6.2 per cent in the last quarter, reaching $39.60 a barrel. Still, it is down by about two-thirds since mid-2014.

“As we see more stabilisation in oil prices, we believe that fundamentals will start taking the front seat once again and dictate the performance of the market,” said Rami Sidani, the head of frontier investments at the asset manager Schroders. “If we look at different companies, especially the blue chips, we think that the market is trading at very attractive valuations offering a great entry point for mid- to long-term investors. As the year progresses and we see more companies’ earnings, which we expect to be relatively resilient, this would start getting reflected in the prices of the market once again.”

Another boost to the market came last month in statements by the US Federal Reserve chairwoman, Janet Yellen, who signalled that interest rate hikes may be pushed back because of global growth uncertainties.

The Federal Reserve, which increased rates in December for the first time in about a decade, had earlier indicated it may raise rates four times this year. It held the rates steady last month.

“The fact that Yellen in her announcement sounded more dovish than the market had expected and, therefore, an increase in interest in April was a possibility, is now probably pushed to June or even September,” Mr Yasin said.

“So we saw a flow of liquidity back into riskier assets like equity, and if that continues going forward, it could be a positive catalyst for us.”

The UAE stock market performance reflects growth expectations for the country. The IMF is forecasting a growth of 2.6 per cent for this year, higher than Saudi Arabia’s 1.2 per cent projection.

Saudi Arabia is sure to remain on the radar screens of investors because of its plan to sell a stake in state-owned energy firm Saudi Aramco. This could happen as soon as next year, according a Bloomberg interview with the deputy crown prince, Mohammed bin Salman.

“Companies in the UAE are supported by an economy and infrastructure that is stronger than their peers in the region and the Gulf Cooperation Council and, therefore, this contributes to having confidence in the market,” Mr Toukan said.

​The S&P 500 index finished the first quarter up 1.4 per cent, while the MSCI Emerging Markets Index closed up 4 per cent.

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