Dubai’s stock market, a haven for investors this year even as violence in the region spread from Egypt to Iraq, is taking the biggest hit on prospects the U.S. may launch a military strike on Syria.
The DFM General Index, which has risen more than any benchmark in the 40 largest equity markets in 2013, lost 1.3 percent after tumbling 7 percent yesterday, the most in four years and the biggest decline among 90 measures tracked by Bloomberg. Qatar’s QE Index dropped 2.3 percent while Saudi Arabia’s Tadawul All Share Index climbed 0.4 percent. Dubai’s 5.591 percent bond due in June 2021 fell to a two-month low.
Dubai, one of seven sheikhdoms that make up the United Arab Emirates, has proven resilient to a global sell-off among developing-nation assets after MSCI Inc. upgraded the U.A.E to emerging-market status and the emirate’s real estate and tourism sectors rebounded. Any escalation of violence in Syria could hit the industries that contribute most to Dubai’s economic expansion, according to Firebird Management LLC.
“As a financial capital of the Middle East, Dubai suffers the most from the overall uncertainty about the region that has been reintensified by the current Syria crisis,” Ian Hague, founding partner of New York-based Firebird, which manages $1.3 billion of assets, said by phone Aug. 27. “Dubai, which has been attracting so much money flow, is hit the worst now by this fear for the future of the whole region. There was unrest in Egypt, there is a crisis in Syria now. What’s next? The cost of business is growing.”
This year’s rally sent valuations for Dubai’s benchmark to a 38 percent premium over the MSCI Emerging Markets Index, the widest gap on record. Today’s drop to 2,516.48 has left shares in the DFM index trading at 13.5 times projected 12-month earnings, compared with a multiple of less than 10.4 for the MSCI gauge.
U.S. Secretary of State John Kerry said that President Barack Obama believes there must be accountability for the “moral obscenity” of using chemical weapons in Syria and evidence is “undeniable” that they were used against residents of a region near Damascus last week. A military strike against Syria will have “great consequences for the region,” Abbas Araghchi, a spokesman for the Foreign Ministry in Iran, a Syrian ally, told reporters in Tehran yesterday.
“There are fears regarding what is happening in Syria and so the panic selling yesterday and early today,” Nabil Al Rantisi, managing director for brokerage at Abu Dhabi-based Menacorp said by phone. “The market recovered because people realised we are not really going to be affected by the strike.”
Dubai’s benchmark has rallied 55 percent this year, the most among the 40 biggest stocks markets, even as protests in the region started with the Arab Spring uprisings in 2011 spread. Egypt’s EGX 30 Index is down 4.3 percent in 2013, after dropping to a year-low on June 24, as the military forced Islamist President Mohamed Mursi out of office and launched a deadly crackdown of his supporters. Turkey’s lira declined for a third day.
The yield on Dubai’s 5.591 percent bonds rose 10 basis points, or 0.10 of a percentage point, to 4.88 percent, the highest since June 26. Dubai’s credit default swaps, or the cost to protect the emirate’s debt against default, climbed 21 basis points to 250 today, according to CMA data.
“Yesterday was panic and looks like a little more today, driven purely by political events and the fear of an escalating conflict,” Amer Khan, a Dubai-based director at Shuaa Asset Management, said by e-mail today. “An involvement of Iran would be negative specifically for U.A.E. sentiment, but the declines must be taken in context of the year-to-date rise.”
Abu Dhabi’s gauge fell 2.2 percent, bringing the two-day decline to 5 percent. Oman’s benchmark index retreated 3 percent and Kuwait’s gauge declined 0.8 percent. Bahrain’s index gained 0.3 percent. Israel’s TA-25 Index fell 0.5 percent after its steepest loss since December 2011 yesterday.
In Iraq, more than 3,000 people have been killed in terror attacks in the past few months. In 2011 and 2012, suicide bombings in Iraq averaged between five and 10 a month. Iraqi Foreign Minister Hoshyar Zebari said on Aug. 16 that al-Qaeda terror attacks have become such a deadly epidemic in Iraq that the government in Baghdad is seeking U.S. advisers, air surveillance or even drone strikes.
In Dubai, wholesale and retail trade accounts for almost a third of the economy, which grew at the fastest pace in five years in 2012 and is set to expand by 4.6 percent on average through 2015, according to government estimates. That’s more than twice as fast as the prior four years.
Emirates Integrated Telecommunications Co. fell 1.7 percent to 6.26 dirhams. Emaar Properties PJSC, Dubai’s biggest publicly traded developer, closed unchanged at 5.70 dirhams after retreating as much as 7 percent during the day.
Foreign investors were net sellers of 61 million dirhams of stock in Dubai today, according to data from the exchange. That compared with purchases of 275 million dirhams yesterday.
“Foreign investors look at this as a region, and not country-by-country,” Al Rantisi at Menacorp said. “The market has rallied and a correction was due, although there is room to grow further and price-earnings multiples are still reasonable.”