From Bear to Bull in 22 Days as Boom-Bust Rules in Dubai

At one point last month, when stocks in Dubai racked up their biggest losses since 2008, as many as nine screens on Mohammed Ali Yasin’s desk at NBAD Securities were showing sell orders. There wasn’t a bid to be seen.

Just three weeks later, buyers started rushing back to the United Arab Emirates’ 48 brokerages. A flip-flop in the world’s most volatile stock gauge after Argentina’s saw the benchmark DFM General Index soar into a bull market yesterday, 22 days after entering a bear rout in June. For Yasin, a 16-year financial industry veteran, the price moves came as no surprise.

“In a way, the lesson of June was forgotten in two weeks,” the 48-year-old managing director at NBAD Securities in Abu Dhabi said by e-mail yesterday. “This is not a mature market and not all the investors can handle the swings. Even though they don’t have the same belief in how long this recovery will last, many have returned to their old habits.”

Leveraged buying, the dominance of retail investors and concern over corporate governance are exposing the vulnerabilities of a market that rose almost threefold in the past 18 months. A 22 percent drop in stocks last month, driven in part by the central bank’s warning that the property sector is overheating, has almost been reversed in July as investors resumed the buying on bets troubled builder Arabtec Holding Co. will preserve its state backing.

More Declines

Equity gains are fragile and volatility could reignite as traders chase the rally amid signs of a property boom that may be getting ahead of economic fundamentals, according to Nabil Rantisi, managing director of Mena Corp Financial Services, the U.A.E.’s second-biggest brokerage by trading value. Less than six years after plans to become a regional hub ended in a real-estate crash and froze credit markets, Dubai said it intends to build the world’s first air-conditioned mini city.

“If we move up from here, we are bound to see another sharp fall,” Rantisi said by phone from Dubai. “While the economy is doing well in general, real-estate prices are a bit on the high side.”

The drop in Dubai’s DFM General Index pushed the gauge’s 30-day historical volatility, a measure of price swings, to 56.2 on July 6, the highest since January 2010. The level fell to 54 today, still the highest among 73 of the biggest global markets tracked by Bloomberg after Argentina’s Merval Index. The June plunge, the steepest in almost six years, echoed the stock-market crashes in 2006, when the gauge dropped 43 percent, and 2008, when it tumbled 72 percent.

The emirate’s benchmark index rose 1.9 percent to close at 4,858.29 today, taking this month’s gains to 23 percent.

Housing Bubble

The economy of Dubai, which narrowly averted a default almost five years ago, may grow 4.7 percent this year, according to government forecasts. It expanded 4.6 percent in 2013, the fastest pace in six years.

Home prices in Dubai rose the most in the world last year, according to Knight Frank LLP, raising concern a bubble may be forming. The International Monetary Fund in May urged the U.A.E. to put in place stronger measures to curb real-estate speculation to prevent an “unsustainable” surge in prices.

The DFM General Index’s bull run, driven in part by the U.A.E.’s promotion to emerging-market status at MSCI Inc., ended May 6, and then entered a bear market on June 23, amid speculation over the ownership structure at Arabtec, the U.A.E.’s largest publicly traded construction company.

The selloff was exacerbated by margin calls, or offers by banks and brokerages to offload stocks to pay back some of the money that was borrowed to buy them, according to both Yasin and Rantisi.

Investors Return

“Portfolios that are highly leveraged to particular stocks are covering themselves with margin calls,” Rantisi said.

Arabtec, which has the fourth-heaviest weighting on Dubai’s index, this month reversed the 61 percent slide in June as concern eased that Aabar Investments PJSC, the builder’s second-biggest shareholder, would divest its stake.

The stock has advanced 72 percent since Khadem Al Qubaisi, who chairs both Arabtec and Aabar, said July 2 the Abu Dhabi government-owned company may rebuild its holding in the Dubai-based builder.

Aabar is in talks to buy at least half of former Arabtec Chief Executive Officer Hasan Ismaik’s 28.85 percent stake, a person with knowledge of the situation said today. The shares, which rose 1.9 percent today, are still down 33 percent since trading at a record high on May 14.

“When Arabtec crashed, many said they would never touch the stock again,” Yasin said. “Now they’ve returned.”

Some U.A.E. banks, which faced a slowdown after the global credit crisis, may have lent high-net-worth investors as much as three times the value of their share portfolios to boost returns, he said.

Market Trends

The stock-market volatility prompted the Securities & Commodities Authority and the central bank to consider amending rules on lending against shares following an investigation.

While margin trading is offered by brokerages globally, its impact depends on the extent to which retail investors dominate the market, according to Tony Hann, head of emerging-market equities at Blackfriars Asset Management Ltd.

“If the retail investors are dominant, then it is their buying and selling patterns that tend to dictate the day-to-day trend in the market,” Hann said by phone from London July 15.

Retail investors accounted for about 75 percent of shares sold last year and 77 percent of those bought, according to exchange data.

“We shouldn’t be giving people the weapon by which to shoot themselves,” Yasin said. “The crash wasn’t justified.”

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