Interpreting Middle East Economic News and Analyzing Market Trends

Dubai Stock Market Crashes… is there more to come or is it a mere bump on it’s ride up?

Source: Zerohedge, Bloomberg

Source: Zerohedge, Bloomberg

 

The Dubai Financial Market (DFM) has officially crashed, losing over 20% of its value since May this year.  Should investors be concerned or will the market continue its  phenomenal rise?

 

In 2013, the DFM gained over 100% making it one of the best performing markets in the world last year.  This year, the market got off to an equally impressive start rising over 60% from January to May and then the market began to fall apart as you can see from the chart above.

 

What’s behind this fall? 

 

We reported on the market’s performance in May this year (here).  We also noticed some crazy things happening to the market inlcuding its first IPO in over five years, which was 36 times oversubscribed.  The craziest part of this story is that the IPO was for a company that didn’t have current operations.  To us, this is a clear sign of an overheated market.  What followed was not surprising to us:

   

24 June 2014: Meltdown at Arabtec hits Dubai markets

A shares meltdown on Monday at the Arabian Gulf’s largest construction company threatened to drag the entire Dubai stock market with it.

Arabtec, the Dubai company that built the Burj Khalifa and has a stake in high-profile projects worldwide, has lost more than Dh16 billion in market value in the past three weeks. Its share price has fallen by nearly two thirds, and plunged by almost 10 per cent in the first 30 minutes of trading on Monday.

In turn, the Dubai Financial Market has fallen by 20.5 per cent since May and dropped another 4.3 per cent on Monday. The main victims have been small investors who own the bulk of Arabtec shares.

The construction giant is thought to have fired its chief operating officer, chief information officer, chief risk officer and head of mergers and acquisitions since the resignation last week of Hasan Ismaik, its chief executive.

Read the full story from The National.

 

The UAE in general has had a phenomenal 2013 and 2014, especially in terms of real estate.  Both rents and property values have risen high enough for the IMF to gently nudge the UAE government into putting in place measures to counter act the formation of another property bubble

 

The stock market tends to be a leading indicator, while the property market is a lagging indicator.  Let’s take a look at the long term performance of the DFM to see what happened when the market crashed in the past:

 

Source: Zerohedge

 

From the chart above you can see that the DFM crashed in late 2005 into 2006 long before the property bubble bursed in 2008.  The market crashed again in 2008 once the Global Financial Crisis took over.  Today, the DFM’s sharp rise in 2013 into 2014 looks a lot like 2004-2005 again.

 

We say you are better off placing your bets elsewhere before you lose more.