Interpreting Middle East Economic News and Analyzing Market Trends

Can the Dubai Financial Market maintain its momentum after rising over 100% in 2013?

MENA 2013 Performance

Source: Global Investment House, market performance to 31 Dec. 2013.

  

In case you haven’t noticed, the Dubai Financial Market (DFM) was the best performing market in the MENA region in 2013 and one of the best performing markets in the world.  The best performing market in the world was the Caracas Stock Exchange, which gained a mind-boggling 452% in 2013.  Needless to say, the DFM is back in business after lack-luster performance since the financial crisis.  Can this momentum continue into 2014?

 

DFM 2013 Performance

Source: Dubai Financial Market

 

As you can see from the chart above, the DFM had a breakout year in 2013 and performed well except for a brief period in the summer.  This is when emerging markets sold-off once the Fed taper-talk got underway.  The Fed managed to calm the market’s nerves by holding off on tapering and the DFM resumed its climb.

 

DFM 10 Year PerformanceSource: Mubasher

 

A look back at the past ten years and you can see the relatively flat performance from 2009 to early 2013.  Two interesting things to point out here; first, the DFM’s all-time high was back in November 2005, well before the housing market peaked in 2008.  It has a long way to go to beat the high from 2005.  Second, the DFM was falling before the global financial crisis was in full swing, which is when Lehman failed in September 2008 and the bank bailouts began.  Why was the market falling before the crisis?  There is no clear answer, but one could be that investors were attracted by the glitz and sparkle of the real estate sector and dumped stocks for real estate.

 

Can the DFM have another stellar year in 2014?  It is highly doubtful.

 

As you saw from the first chart above, the DFM’s performance is closely correlated to emerging market performance.  In the summer of 2013 the DFM lost over 30% of its value in a matter of weeks as investors bailed on nearly every emerging market.  India and Indonesia saw their markets and currencies dive.  Brazil and Turkey, once the high-flyers of emerging markets, joined the rest to the bottom.  Today, emerging markets remain jittery and investors continue to sell out of these markets.  Goldman Sachs recently made headlines by calling for an exit from emerging markets.

 

Overall, emerging markets face a tough year.  Foreign investors are leaving, bond yields are rising and there are signs of social instability in many of them (such as Brazil and Turkey).  The DFM’s performance is correlated to other emerging markets regardless of whether or not local fundamentals are stronger than other markets.  When one drops, they all drop.  For those of you who were fortunate enough to ride the wave up in 2013, it would be wise to realize your gains now before they evaporate.