Dubai's stocks posted the biggest swings in the world in the past month as concern that the United States is moving closer to a military strike against Syria led investors to exit this year's best-performing index.
The DFM General Index's 30-day volatility, a measure of fluctuations in Dubai's equities gauge, rose to 32.9 at 12.28pm on Tuesday, the highest since March 2012 and the most among 72 indexes around the world. That is two points above the Philippines and three above Japan and marks the biggest spread in more than three years to the MSCI ACWI Index of emerging and developed-world stocks.
The benchmark index in Dubai has dropped 14 per cent since reaching a five-year high on August 25, as the US president Barack Obama called for military intervention in Syria over a chemical attack.
The absence of unrest in Dubai as uprisings swept through the Middle East since 2011 had earned the emirate safe-haven status among investors, who drove the index up more than any benchmark in the 50 largest equity markets in 2013.
"Market participants were caught a little by surprise by the US move after the chemical attack," Sebastien Henin, a portfolio manager at The National Investor in Abu Dhabi, said. "They were not expecting any western involvement in a conflict that's two years old."
Dubai's index rallied 69 per cent this year through August 25 before shares succumbed to selling amid concern the fallout from any Syria escalation will dampen a recovery in tourism and trade, the main drivers of economic growth. Higher volatility means an asset or index can swing dramatically in a short period, increasing the potential for unexpected losses.
"The volatility really spiked in the past 10 days, as the talk of a western strike on Syria emerged," Mahdi Mattar, Abu Dhabi-based chief executive of Finance House Capital, said by email. "The market is one of the best performing in the world, and speculative investors provide most of the liquidity."
Deyaar Development, the second-biggest gainer on Dubai's benchmark index this quarter with a 46 per cent rally, saw its 10-day price swings soar to 131 on Tuesday, the highest since December 2009.
Deyaar and Union Properties together accounted for more than 40 per cent of volumes on the DFM this month through Tuesday.
Union Properties, whose shares have risen 49 per cent this quarter, posted 10-day price swings of 128 through Tuesday, also near the highest in almost four years.
The volatility reading for Emaar Properties, Dubai's biggest stock, was less than half that at 57.
"Retail investors have been very active in the summer, and that's something new," Mr Henin said. "Hot money came in during August targeting high-beta names and penny stocks. That cash is fast to go in and fast to leave."
Before the Syria risks worsened, Dubai's index had proven resilient to this year's sell-off of emerging-market assets, which pushed the MSCI Emerging Markets Index down 11 per cent.
Shares in the DFM trade at 11.2 times projected 12-month earnings, compared with a multiple of 10.1 for the MSCI gauge.
"The volatility will continue, but the uptrend will not disappear," Mr Henin said. "What is happening isn't insignificant, but the macro story across the region is intact."
Wholesale and retail trade, which account for almost a third of Dubai's economy, grew at the fastest pace in five years in 2012 and is set to expand by 4.6 per cent on average through 2015, according to government estimates.
Dubai's property industry is also recovering. A growing population and improving economy are the causes, rather than the speculation that fuelled the boom before 2008, Standard Chartered said this week.
"Near term, we could continue to see volatility based on news headlines," Amer Khan, a director at Shuaa Asset Management, said by email. "Over the medium term, the UAE's fundamentals remain strong and it should eventually be reflected in valuations."