July 2 (Bloomberg) -- The United Arab Emirates’ market regulator is investigating share price declines in Dubai and Abu Dhabi during June that led the world’s best performing stock index to post its worst month in more than five years.
Dubai’s benchmark share index plunged 22 percent last month, its biggest decline since November 2008, fueled by changes in ownership and management at Arabtec Holding Co., the country’s largest publicly traded construction company. The index rebounded this week, erasing some of the losses, and is up 30 percent so far this year, making it the best performer in dollar terms among more than 90 gauges tracked by Bloomberg globally.
The price declines brought back memories of crashes in 2006 and 2008 and sparked concerns about the quality of corporate governance and regulation in the U.A.E., whose exchanges began trading as emerging markets last month. It also prompted members of the U.A.E.’s Federal National Council, an advisory authority that represents the interests of the Emirati population, to call for more robust legislation.
The Abu Dhabi-based Securities & Commodities Authority will take legal action and put in place “adequate preventive measures” if any wrong doing is discovered, it said today in an e-mailed response to questions from Bloomberg News. “Given the nature of the high volatility price movements that were witnessed lately on the financial markets, the SCA is closely and thoroughly assessing and investigating” the reasons behind the price fluctuations, it said.
There is a need for greater market transparency to boost the confidence of local and foreign investors, Ahmed Mohammed Rahma al-Shamsi, an FNC member said in an interview June 25. “A lot of people have liquidity, but they don’t trust the markets,” he said.
SCA’s investigation would include considering all possible factors that could have “illegally contributed” to the recent volatility, it said. The regulator is also probing violations of margin trades, where banks and brokers lend money to investors to trade.
This “is good for the market and a step in the right direction,” Wadah Al Taha, chief investment officer of Dubai-based Al Zarooni Group, said by telephone today. “We need to identify the wrongdoers and repeat offenders.”
The U.A.E.’s exchanges along with Qatar’s were reclassified as emerging markets in June 2013 by index provider MSCI with the change taking effect last month. Dubai’s gauge more than doubled almost a year after the upgrade on bets the change will lure investors managing about $8 trillion in assets. Arabtec is among nine U.A.E. companies included in the MSCI Emerging Markets Index.
The builder, whose shares soared to a record 7.40 dirhams in May, lost value almost as quickly as the stock market legally allowed, sparking a selloff in the emirate’s benchmark index as confidence in a property-led rally was shaken.
SCA “demanded” Arabtec “react to the rumors and to provide clarifications to the disclosures it had made against itself and its CEO,” it said in a separate statement today. It is also scrutinizing publicly listed companies adherence to listing regulations and corporate governance practices.
Arabtec held a news conference in Abu Dhabi today to clarify some investors’ concerns. There are no improprieties relating to the company and there is no corruption linked to the outgoing Arabtec chief executive officer Hasan Ismaik, who resigned last month, Chairman Khadem Al Qubaisi said today.
The U.A.E. economy, the Arab world’s second-biggest, is expanding thanks to a boom in its tourism, trade and property industries. Buoyed by the turnaround, Dubai’s benchmark share index has surged 171 percent since the end of 2012, while Abu Dhabi’s gauge has added 80 percent.
It is expected that “following the record highs the markets recorded throughout last year and in the first quarter of this year, there will be waves of corrections, especially in the wake of the U.A.E. market upgrade by the MSCI index,” according to SCA’s statement.
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