Sleepless in Dubai as Traders Rejoice Eight-Fold Volume Gain

Photographer: Duncan Chard/Bloomberg

Financial data is displayed on a screen at the Dubai Financial Market in Dubai, United Arab Emirates. Close

Financial data is displayed on a screen at the Dubai Financial Market in Dubai, United Arab Emirates.

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Photographer: Duncan Chard/Bloomberg

Financial data is displayed on a screen at the Dubai Financial Market in Dubai, United Arab Emirates.

Just four months ago, share prices and trading values in Dubai fell to the lowest levels since 2004. Now stock trading has increased eight-fold, the most among the world’s 40 biggest markets, as the emirate rebounds from its biggest financial crisis.

“In December, you could fall asleep at your desk and wake up and nothing would be happening,” said Waleed Al Khateeb, 37, the senior finance manager at Daman Securities LLC in Dubai. This year, brokers are working non-stop “dealing with this increased activity,” he said in a March 15 phone interview.

The Persian Gulf financial center was upended in 2009 and again in 2011 by Europe’s debt crisis, popular uprisings in the Middle East and speculation that Dubai’s borrowers will struggle to repay about $10 billion of debt due this year. Now, investors are returning after the European Central Bank bolstered credit markets, the sheikhdom evaded protests that turned violent in nearby Bahrain, state-owned companies refinanced debt and developers posted earnings that beat analysts’ estimates.

Dubai’s DFM General Index (DFMGI) surged 22 percent this year through yesterday, the third-best gain worldwide after equity gauges in Egypt and Vietnam. The measure is still 74 percent below its 2008 peak, before Dubai’s real-estate bubble burst and the emirate required a $20 billion bailout led by Abu Dhabi to repay debt. The DFM index trades for 10.6 times estimated profit and 0.7 times net assets, compared with multiples of 10.6 and 1.7 for the MSCI Emerging Markets Index (MXEF), according to data compiled by Bloomberg.

Economic Recovery

The DFM General index climbed 0.3 percent to 1,660.94 at 11:19 a.m. in Dubai.

Credit markets also show improving sentiment. Yields on the government’s 7.75 percent bonds due 2020 have dropped 67 basis points, or 0.67 percentage point, this year to 6.25 percent, within four basis points of the lowest level since the debt was issued in September 2010. Credit-default swaps on Dubai fell 110 basis points to 335 basis points, compared with 375 for Italy, according to data provider CMA.

Dubai’s economy, which contracted by 2.4 percent in 2009, will expand by as much as 5 percent this year, the government said on Feb. 15. Home sales increased 67 percent by value in the fourth quarter from a year earlier, Land Department data show. Tourist arrivals rose 10 percent in 2011 as hotel revenues gained 20 percent, the emirate said March 7.

The 30-day average value of shares traded on the Dubai Financial Market (DFM) soared 725 percent to 491 million dirhams ($134 million) yesterday, from a seven-year low of 59.6 million dirhams on Nov. 27. The value of shares traded in Saudi Arabia more than doubled for the second-biggest increase among major markets, data compiled by Bloomberg show.

‘Genuine Turnaround’

Abu Dhabi Financial Services and Al Ramz Securities LLC said the increase in trading may help them post a profit this quarter after all five of Dubai’s top brokerages reported losses in 2011. Nabil Rantisi, who left his job in June as the director of brokerage at Rasmala Investment Bank Ltd. in Dubai to help start a local delicatessen named 1762, said he may return to the finance industry should the rebound continue.

“This is a sign of a genuine turnaround and not just a bear market rally,” Rantisi said. The rally will benefit “brokerage houses who decided to stick around,” he said.

Many did not. About 50 of the 98 brokerages operating at the end of 2008 have closed or had their trading licences suspended, according to data on the market regulator’s website. Shareholders of CAPM Investment PJSC, an Abu Dhabi-based financial services company that operated a Dubai stockbroker, decided last week to sell itself to a U.A.E. lender after incurring losses, Chief Executive Officer Yasser Geissah said in a March 22 interview.

Drydocks Debt

Markets in Dubai, which borrowed more than $100 billion to transform itself into a financial and tourism hub, suffered a meltdown in 2009 after state-owned holding company Dubai World said it was seeking to freeze debt repayments.

Even after dropping this year, Dubai credit default swaps are 225 basis points more expensive than contracts on China, the biggest emerging economy, up from 61 basis points four years ago, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market.

Dubai Group LLC, an investment firm owned by Sheikh Mohammed bin Rashid Al Maktoum, the emirate’s ruler, is in talks with banks to reschedule payments on $6 billion of bank debt. Drydocks World LLC, which owns the Middle East’s biggest shipyard in Dubai, presented a plan to creditors earlier this month to restructure $2.2 billion of debt.

Iran Concern

The risk of conflict in Iran, located about 100 miles (161 kilometers) from Dubai, has kept Advance Emerging Capital’s Slim Feriani from boosting equity holdings in the U.A.E. U.S. President Barack Obama said March 4 he takes “no options off the table,” including a “military effort,” to stop the government in Tehran from obtaining a nuclear weapon.

“We remain cautiously optimistic and we’re not going to go pile up” on stocks in the U.A.E., said Feriani, the chief investment officer at Advance Emerging, which oversees about $800 million in emerging and frontier markets. His Advance Frontier Markets fund has about 3 percent of its assets in the U.A.E. and about 25 percent in the Persian Gulf region.

“A conflict with Iran could have some seriously negative implications on sentiment,” Feriani said.

Gains in some of Dubai’s best-performing stocks have been sparked by “rumors” rather than earnings and valuations, said ING Investment Management’s Yazan Abdeen.

‘Quick Profit’

Arabtec Holding PJSC (ARTC), the construction company that proposed cutting its stock dividend on March 8 and posted a 15 percent drop in 2011 profit, has surged 79 percent this year amid speculation the company will win new contracts in Abu Dhabi and a regional investor was accumulating the stock. Chief Financial Officer Ziad Makhzoumi didn’t return a phone call and text message seeking comment.

Arabtec shares trade for 22 times estimated 2012 earnings, compared with the median multiple of 13 times for global peers, data compiled by Bloomberg show.

“The money in the market is after quick profit,” said ING’s Abdeen, who helps oversee about $250 million as a money manager in Dubai.

Investor demand for riskier assets worldwide has increased after the ECB said in December it will offer unlimited three- year loans to banks, easing concern of a financial crisis in the world’s second-biggest economic bloc.

ECB Boost

Dubai doesn’t need to raise money from international bond markets in 2012 and has “no intention” of seeking support from Abu Dhabi, the sheikhdom home to more than 90 percent of the U.A.E.’s oil, Mohammed Al Shaibani, director general of the Dubai ruler’s court, said on Feb. 15. Crude has climbed 8.2 percent in New York trading this year to $107.03 a barrel.

Dubai Holding Commercial Operations Group LLC, the real estate and hospitality company owned by Dubai’s ruler, repaid a $500 million bond maturing on Feb. 1. The debt had traded for as little as 91.4 cents on the dollar in October.

Dubai Electricity & Water Authority’s Chief Executive Officer Saeed Mohammed al-Tayer said in a March 13 interview that the state-run utility will repay 1.2 billion dirhams of loans ahead of schedule.

Emaar Properties PJSC (EMAAR), developer of the world’s tallest skyscraper in Dubai, said on Feb. 14 that fourth-quarter profit more than doubled, beating the average estimate of five analysts compiled by Bloomberg. The company is valued at 0.6 times net assets, less than half the 1.4 median ratio of global peers, according to data compiled by Bloomberg.

Emaar Earnings

Drake & Scull International PJSC (DSI) reported a 36 percent increase in annual profit on Feb. 13, topping analysts’ projections. The Dubai-based construction company trades for 11 times reported earnings, compared with the median multiple of 15 for global peers, data compiled by Bloomberg show.

“The markets had gotten cheaper and there’s a fundamental valuation case there,” said Andrew Howell, a London-based strategist for frontier and emerging European markets at Citigroup Inc. (C) who advises frontier-country investors to hold more U.A.E. stocks than are represented in benchmark indexes.

Foreign money managers, who sold a net $45 million of Dubai shares this year, may return after the outlook for economic growth improved, according to Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder Investment Management, whose parent company oversees about $291 billion.

‘Blue Chips’

“International investors will start looking again at the market,” Sidani said in a March 15 interview. “The blue chips which have underperformed continue to offer great investment cases.”

Ziad Dabbas, an adviser to Abu Dhabi Financial Services, said the brokerage is fielding 50 to 60 calls a day from clients and potential clients asking about the stock market, up from about 15 on slower days at the end of 2011. The brokerage unit of National Bank of Abu Dhabi PJSC, the U.A.E.’s second-biggest bank by assets, will return to profit this quarter if volumes remain high, Dabbas said.

“The past year was the survival of the fittest,” said Hassan El Salah, the head of institutional equities at Al Ramz Securities LLC, an Abu Dhabi-based brokerage that was ranked first by the value of shares traded in Dubai in February. He said the company plans to expand should volumes be sustained.

Revenue from trading a few months ago barely covered daily expenses for most brokerages, said Daman Securities’ Al Khateeb. Now that volumes have climbed, Daman isn’t worried about whether it would have to close in tougher market conditions, he said.

“We are a believer in this market,” Al Khateeb said. “We believe this year will be a strong one.”

To contact the reporters on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editor responsible for this story: Laura Zelenko at lzelenko@bloomberg.net

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