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Premature to buy UAE stocks ahead of a Dubai World deal?

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The floor of the stock markets in the UAE have been unusually full of investors this week with rumours in the air about a possible quick settlement of the $22 billion Dubai World debt rescheduling.

The debt problem has hung over local stock markets like a lead balloon since the end of last year. Indeed local stock markets have not recovered from the lows of last March like the rest-of-the-world but have actually come very close to retesting those lows over the past month.

Dubai World

Assuming that positive news on Dubai World will raise local stock prices is therefore something of a no-brainer. But life is seldom so simple for investors, and there are two good reasons not to invest prematurely in UAE stocks.

First, the rumours of a settlement can only ever be rumours before it is done. There could be a last minute hitch, or the whole idea may have been exaggerated – perhaps by market traders!

Secondly, the UAE stock markets are not the only ones under a cloud at the moment. Global markets have enjoyed a huge rally since the lows of last March – unlike the UAE it must be conceded – and there is strong reason to believe this rally is almost over.

Arabianmoney has it on excellent authority that the Fed is about to raise US target overnight interest rates next Tuesday (click here). That would certainly result in a correction for equities, and that would surely be a part of the idea as stock market valuations have become dangerously over-inflated. It would also rally the bond market that has been looking sickly just lately.

But the UAE bourses would undoubtedly get caught up in this downswing, if for no other reason that local investors would have to sell to cover global margin calls.

Ultimate market bottom

Probably that will also create the ultimate buying opportunity for UAE stocks, providing of course that you have not been wiped out in the global stock market correction or cash.

Of course, the risk of waiting is that you miss the impact of a sudden Dubai World settlement and that fears about a global stock market correction prove misguided.

One visiting banker from JP Morgan last week told Arabianmoney that he thought the UAE an excellent long-term buying opportunity but that he would not risk his money before seeing what happened with Dubai World. He reckoned it was better to miss the first 10 per cent of the market rally than risk another disappointment. That said the Dubai Financial Market does look bombed out:

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Written by Peter Cooper

March 11, 2010 at 8:37 am

Posted in Banking, UAE Stocks

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