Signs of a correction are everywhere, but UAE equities may survive another week relatively unharmed if investors keep banking on the Emirates graduating to the MSCI Emerging Markets Index.
Pressure for profit-taking has been building in the past few weeks as equities have rallied 17 per cent in Dubai and 5 per cent in Abu Dhabifrom lows in February.
Still, investors have avoided a broad sell-off by diving into shares of large-cap companies such as National Bank of Abu Dhabi and Emaar Properties, which have significant weighting on the MSCI Frontier Markets Indices, hoping that the UAE will be upgraded on June 21.
That strategy may bolster the market for a little longer. But with the international backdrop appearing more bearish, investors are becoming more sensitive to risk in general.
"Investors are already positioned for the MSCI announcement, but there are no real catalysts between now and June as earnings have already come out, so we are expecting activity to dwindle as we go into the summer," said Tarek Lotfy, a managing director at Arqaam Capital in Dubai. "On top of that, international markets may have caused some jitter among local investors."
The Abu Dhabi Securities Exchange General Index ended last week unchanged at 2,654.82, while the Dubai Financial Market General Index slipped 0.1 per cent to 1,583.01.
The lack of risk appetite was felt more on some of the regional bourses last week. Qatar's benchmark declined 0.3 per cent to 8,636.79, Bahrain's was down 0.8 per cent to 1,371.65, and Oman's fell 1.6 per cent to 6,048.33. Kuwait's index bucked the trend, rising 0.5 per cent to 6,475.50 at the end of the week. The Saudi Tadawul All-Share Index closed up 0.6 per cent at 6,731.24 yesterday.
A sharp sell-off in commodities this month was seen by many as the first sign of an approaching market correction. The US dollar has been strengthening since then, in another sign that appetite for risk is dwindling.
Fears about a possible debt restructuring by Greece are rising.
"As much as the politicians try to put a positive spin on events, the data continues to show a Greek situation that is spiralling beyond the politicians' control," said Gary Duncan, the chief investment officer for private banking at Emirates NBD. "The euro-zone finance ministers meet this coming week to try to resolve the situation. However, a more likely outcome is further delays to taking any real decisions."
The European Commission's updated forecast last week portrayed a Greek fiscal deficit of some 9.5 per cent of GDP this year and 9.3 per cent next year compared with previous estimates of 7.5 per cent for both years. The cost of insuring against a Greek debt default has fallen from a peak of 1,369 basis points but remains elevated at 1,251, up from 974 basis points last month.
"With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction," said Haissam Arabi, the chief executive of Gulfmena Investments in Dubai.
"If you continue to see the dollar strengthening, it should provide a headwind for commodities and for the S&P.
"That could dampen sentiment and put pressure on our markets."
The Standard & Poor's 500 Index and the Dow Jones Industrial Average both declined 0.7 per cent on Friday, to 1,333.27 and 12,512.04, respectively.
The euro dropped to a seven-week low versus the dollar. It was down 1 per cent to 1.4161, its lowest since March 29. Brent crude for July delivery has declined 10.5 per cent to US$112.39 a barrel since its high on April 29.
"With sentiment fragile, volatility is here to stay for some time, especially in the short term, and we'll have to live with it," said Sachin Mohindra, the lead manager of Invest AD's GCC Focus Fund.