UAE brokerage firms hit by a thinning stock market volumes

Brokerages in the UAE will face tough times this year and may have to merge, close down or suspend their operations after traded volumes last year dropped by as much as 60 per cent from the year earlier, brokers said.

“As long as there are thin volumes in the market, it is more probable for brokerages to close down because the situation is a bit bad,” said Wael Darwish, the general manager of Mubasher Financial Services, a Dubai-based brokerage. “There may be consolidation.”

Average daily traded value on the Dubai Financial Market (DFM) last year fell by 60.3 per cent to Dh603.2 million, compared with 2014.

Average daily traded value on the Abu Dhabi Securities Exchange (ADX) declined by 58.3 per cent to Dh240.5m, compared with 2014.

“2016 looks to be a tougher year in terms of revenue and I think based on that it will be a more challenging one for the ones who have lower market share than 1 or 1.5 per cent to be in the black,” said Mohammed Ali Yasin, the managing director of NBAD Securities in Abu Dhabi.

“I will not be surprised if we see 10 to 20 per cent of the brokerage companies either close down or suspend their activities.”

There are 49 brokerages licensed to trade on the DFM and ADX, according to the regulator, the Securities and Commodities Authority (SCA). That is down from more than 90 before 2008.

After the start of the financial crisis of 2008, several brokerages were forced to close down or suspend their operations due to mounting losses as the stock market crashed.

“I don’t believe we are going through the same period of low traded value, but definitely 2016 looks to be a challenging year for brokerage companies,” said Mr Yasin.

“The difference in 2015 to 2016 and 2008 to 2009 is that people have liquidity. They are not as stretched or overleveraged as in 2009.”

Brokerages are cutting costs and offering discounts to boost business. Mubasher, for example, is offering rebates to clients this year to encourage trading, about 60 per cent of which is online.

Mubasher is also in the process of merging with Dubai-based Al Safwa Islamic Financial Services, a move that would expand its market share. The merger is expected to be concluded by March.

“Some brokerages have already shrunk their budgets for 2016 and some of them are shrinking manpower also for 2016 in an attempt to try to overcome the low revenue that is expected,” said Mr Yasin.

The thin turnover is not the only negative factor. The DFM general index closed 2015 down 16.5 per cent for the year, the second worst performer in the Arabian Gulf region after Saudi Arabia, where the main index lost 17.0 per cent. The ADX general index fell by 4.8 per cent.

“Given current economic circumstances, we believe that strategic consolidations, which can make brokerage players bigger, stronger and more efficient are a viable option to avoid systematic risks,” said Mohammad Al Dandashi, partner and managing director of the Abu Dhabi-based brokerage Al Ramz Capital.

“In our opinion, this would definitely help achieve our vision towards upgrading our markets from an emerging status to a developed market in the longer term.”

The UAE markets were upgraded in 2014 to emerging market status from frontier by the index complier MSCI, but that hasn’t helped to increase liquidity in the market. “To return liquidity to the market, we need to bring back first the big players in the market,” said Mr Darwish, pointing to institutions and state funds in particular.

Mr Yasin is forecasting a 10 to 15 per cent drop in UAE stocks this year, with the Dubai index dropping below the 3,000 mark (it finished last year at 3,151.00). Traded value could drop by 20 to 25 in the UAE markets, he said. Mr Darwish believes stocks will have to drop to become attractive to investors, who will be looking for bargains.

Several factors will affect the performance of the stock market, from the oil price to the conflict in Yemen.

“We see a further upside for companies that enjoy strong fundamentals, as well as for those which pay high dividend yields,” said Mr Al Dandashi. “The stability of oil prices will remain a major factor as well as the Yemen issue, if resolved, shall definitely give investors confidence.”

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