UAE STOCK MARKETS' DOWN AS LIQUIDITY DRIES UP

C O N F I D E N T I A L ABU DHABI 000975

SIPDIS

SIPDIS

DEPT FOR NEA/ARPI, EB/IFD/OMA
TREASURY FOR OIA/BMENA

E.O. 12958: DECL: 03/14/2016
TAGS: EFIN AE
SUBJECT: UAE STOCK MARKETS' DOWN AS LIQUIDITY DRIES UP

Classified By: Ambassador Michele J. Sison for reasons 1.4 (b & d).


1. (SBU) Both of the UAE's domestic stock markets have
dropped in value sharply since the beginning of the year.
Dubai's stock market dropped by five percent on March 13 to
its lowest point in 11 months. Abu Dhabi's stock market
dropped by about two and a half percent on the same day.
Dubai's market is now down by over 30 percent and Abu Dhabi's
is down by almost twenty percent since the start of the year.
Two large IPOs have sucked liquidity out of the stock
markets as investors sell holdings to buy shares in two
companies (UAE mortgage house Tamweel and the UAE's second
telecom servic%mQ6


2. (SBU) Two financial analysts told econchief that there
were several causes for the drop in price. The most
important reason was the intense interest in the above IPOs.
In addition, however, they noted that both the Dubai and Abu
Dhabi stock markets had finished 2005 significantly
overvalued and were due for a "correction." One noted that
many of the Arab markets were seeing a correction, citing
recent protests in Jordan and Kuwait over drops in market
prices. They both argued that the UAE's markets were now
much more reasonably priced, if not relatively cheap. They
stressed that most companies' fundamentals and profitability
were good. One commented that banks such as Abu Dhabi
Commercial Bank and National Bank of Abu Dhabi were both
undervalued, and that he was recommending that his clients
buy. He admitted that the stock markets were not likely to
increase in value by 40 percent, but commented that a 10
percent increase was doable and "good money."


3. (SBU) Both analysts stated that there was a feeding frenzy
for the two IPOs, with investors selling shares to
participate in what would be oversubscribed IPOs. They
explained that there were other factors pushing the stock
market prices down as well, including some selling by UAE
mutual funds that had reached their lower price limits, and a
certain market hysteria. One noted that herd behavior
applies to selling as well as buying. One analyst also
stated that the UAE stock markets lack credibility,
explaining that the Securities and Commodities Authority (the
regulator) shared board members with the stock exchanges, and
that these board members also owned companies and brokerage
houses which, he said, raised the risk of insider trading.


4. (C) Consul General Dubai asked Minstate for Cabinet
Affairs (and Dubai Holdings chairman) Mohammed Gergawi how he
explained the recent crash in stock prices (at the time of
the conversation -- mid-day -- Dubai prices were down an
additional ten percent). Gergawi said a big part of the
problem was the lack of long term investors. "In our young,
immature market, nearly all the investors are day traders."
Another big problem, he said, was "insider trading." Gergawi
said he had recently counseled Minister of Economy Lubna Al
Qassimi about the need to "completely update" the UAE's
trading laws, with the aim of providing greater transparency.
"I told her to study the laws in the U.S. and Britain and
pattern our new law after that," Gergawi said.


5. (SBU) Comment: Sharp inflows of capital over the last few
years have contributed to strong UAE economic growth. They
also contributed to a sharp increase in the stock market
capitalization with share prices that many observers thought
were higher than market fundamentals would justify. Both
markets are still relatively illiquid (few tradable shares)
as reflected by the sharp drop in market indexes as
participants rush for two large IPOs. End Comment.
SISON