UAE MARKET FLUCTUATIONS NOT AS DIRE AS EARLY PRESS REPORTS

UNCLAS SECTION 01 OF 02 ABU DHABI 000950

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E.O. 12958: N/A
TAGS: ENGR ECON EFIN AE
SUBJECT: UAE MARKET FLUCTUATIONS NOT AS DIRE AS EARLY PRESS REPORTS
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1. (SBU) Summary: UAE markets have shown some signs of volatility
over the past few weeks, contributing factors including fears of a
real estate slowdown and media reports citing the likelihood of the
Central Bank tightening its lending policies to hedge against
inflation and speculative behavior. Despite the press hype, local
analysts are taking a calmer, more nuanced view of the situation.
End summary.


2. (U) On August 14, UAE stock markets rebounded following what
many media sources had coined a "plunge." While local and
international press reported on panic selling with a sense of alarm,
and described the week-long dip as indication of an ensuing bear
market, financial analysts took a more nuanced view. After stocks,
including Emaar Properties PJSC and mortgage lender Tamweel, spent
the week in the red, the Dubai Financial Market General index (DFM)
-- which had sunk by 8.93% over the past 7 consecutive sessions --
rose by 130.2 points (2.63%),to close at 5,074.9. The Abu Dhabi
Securities Exchange (ADX),closing at 4,463.21, also witnessed
gains, rising 70.66 points (1.61%) after 8 back-to-back losing
sessions.


3. (SBU) The Dubai Financial Market and Abu Dhabi Securities
Exchange both declined at the onset of the week of August 17, down
.57% and .07% respectively. While leading shares like Emaar,
Arabtec, and Dubai Islamic Bank closed up (.31%, .33%, and .13%
respectively),Tamweel saw its stock continue to fall, down 4%, as
rumors of corruption charges against its senior management emerged.
Emirates NBD also declined, closing on the 17th down by 3%. On the
ADX, Abu Dhabi Commercial Bank's shares rose by 4.2%, Abu Dhabi
Islamic Bank by 1.6%, and Sharjah Islamic Bank by 1.3% while
pressure from other sectors -- namely energy, insurance, and
construction -- led the ADX to close the day slightly down.


4. (U) Contributing factors to the downturn in the markets included
fears of a real estate slowdown, sparked by the publication of a
Morgan Stanley Report, "Winners and Losers in MENA Property" that
cites a correction in Dubai housing prices starting in 2010 and
reports in local media indicating that the UAE Central Bank was
likely to tighten lending for personal loans and small businesses to
hedge against rising inflation and rein in speculative behavior in
the real estate sector. However, many financial analysts took a more
relaxed view, recognizing that a similar phenomenon occurred at the
same time last year, and indicating that the downturn involved low
volumes and thereby not as significant as the press was making it
out to be.


5. (SBU) A Dubai-based Credit-Suisse research analyst told TREAS
officer that while the markets had momentarily dipped, there was not
"a significant cause for concern" since the same scenario had
unfolded last year at this time. While he mentioned the effect that
the Morgan Stanley report had had on investors' confidence, and
concerns regarding a correction in the real estate sector in Dubai
in the near term, he confided that the report was analytically weak
and not a good product. He explained that there were other factors
contributing to the decline. First, declining oil prices could be
affecting the markets (although this is not a major concern as GCC
countries' budgets account for much lower price/barrel in their
annual budgets than what is actually being realized in terms of
revenue). Second, global trends and volatility in international
markets may be at play as a worldwide phenomenon of negative
sentiment by investors in emerging markets is also reaching the GCC.
(The flow of foreign investment funds to the UAE slowed last week,
but sales have picked up in recent days.) A third factor, as
referenced above, is a relative lack of liquidity in the UAE in the
summer months as the market decreases on very low volumes. However,
selling pressure did continue relatively unabated as investors,
fearful of losses, started selling heavily those stocks that had
recorded the highest profits. Hence, the research analyst continued,
the sale of real estate and construction stocks like Arabtec (the
highest gainer YTD) and Emaar (the largest real-estate developer in
the MENA region) fell to its lowest levels since April 2005. Thus,
the 7-session-long downturn was sentiment-driven rather than fueled
by a change in market fundamentals -- as was also the case last year
at this time.


6. (SBU) The Deputy General Manager for Financial Services at the
Commercial Bank of Dubai voiced similar views, explaining that while
the Morgan Stanley report is partially to blame, the perception that
the Central Bank will take active measures to curb inflation and
clamp down on speculation in the real estate sector is also at work.
He explained that while the global credit crunch is having a slight
effect on UAE markets and domestic lending policies are factoring
into lower liquidity levels (deposit rates are a bit low and the
scale of lending has been high),it is not considered likely that
the Central Bank will take significant action to tighten monetary
policy in the near term. Finally, reports that local banks are
suffering a credit crunch that will have sustained, long term
effects on the Emirati economy are overly alarmist, he claimed.
These reports fail to mention and take into account that most banks

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have at least some government ownership and would thereby have
access to funds from the government if and when "push came to
shove."


7. (SBU) An associate at The National Investor echoed these
explanations, indicating that the market slowdown is a result of a
combination of many investors being away for summer vacation, the
onset of Ramadan next month, and a recent IPO (Drake and Scull) that
was 100 times over subscribed and "sucked liquidity out of the
market." Commenting on last week's downturn and indications of a
potential Emirati "credit crunch," an associate in the Emerging
Markets division at the Abu Dhabi Investment Authority (ADIA) added
that "Dubai Inc." would be the most at risk if liquidity shortages
ensued due to how leveraged balanced sheets are in Dubai. However,
he does not believe that this is an issue in the near term and
assumes that investors will "keep the tap on for quite some time."
He doubts that the effects of a liquidity shortage will be felt this
year although the fundamentals in certain industries are starting to
show signs of overstretch.


8. (U) Comment: Following the downturn earlier in the month, UAE
stocks have continued to show good valuations over the course of the
week beginning August 17. The DFM and ADX have continued to rise,
albeit amid low trading volumes. The analysts' matter-of-fact
reviews seem to describe the fluctuation more accurately than the
earlier press excitement. End comment.

QUINN