x Abu Dhabi, UAEFriday 19 January 2018

Frank Kane’s column: Between a black rock and a hard place

The Dubai and Abu Dhabi markets experienced small declines on the day the BlackRock view was made known, but recovered the following day, suggesting that many think it a storm in a teacup. But the lessons should be learnt.

How should UAE and regional markets react to the news that BlackRock, the American investment institution reckoned to be the biggest asset manager in the world, has scaled back its buying of shares in Dubai and Abu Dhabi?

The company said it was reducing its exposure to UAE markets after detecting what it called signs of “speculative excess that warrants caution” in local markets. Other big global investors might feel the pressure to follow BlackRock’s example, some local market professionals fear.

The Dubai and Abu Dhabi markets experienced small declines on the day the BlackRock view was made known, but recovered the following day, suggesting that many think it a storm in a teacup.

But the lessons should be learnt. International investors are often proved right in the long run. If local markets really have outrun themselves, a period of realistic correction is no bad thing, and could turn out to be a blessing in disguise as local exchanges enter a critical period of their development.

The last thing they want now is a repeat of the equities collapse of 2006, which left UAE markets badly equipped to withstand the financial crisis two years later.

There are some important reasons to think that will not be the case this time. First, set against a 12-month backdrop, BlackRock’s reasoning looks perfectly prudent. The Dubai Financial Market was the best performing stock exchange in the world in 2013, doubling the value of its quoted stock in the period. That run continued this year, ahead around 24 per cent so far.

The Abu Dhabi Securities Exchange also witnessed significant gains, around 70 per cent ahead on 2013 and 15 per cent ahead this year.

BlackRock runs what it calls a “relative strength index”, which is intended to signal when a market has been overbought, and the UAE markets crossed the threshold some time in January. So its caution is understandable.

On the other hand, you might quibble with some of the American firm’s arguments. It noted that the two UAE markets’ rise had been driven by retail interest, rather than institutional investors, but if BlackRock has only just noticed this you might argue with its overall investment expertise. It has always been thus in the two UAE local markets, and has much to do with basic investment culture. If BlackRock didn’t understand that when it got in, perhaps it should never have done so in the first place.

Retail investors are more volatile and capricious than institutions, it is true, but they also supply liquidity, essential for the well-being of a market.

In any case, there are signs that the UAE is taking steps to rectify the reliance on retail investors in its local markets. The push for inclusion in the MSCI emerging markets index is one example. Agreed with the index makers in principle, it will take effect in a couple of months, permitting global institutions to invest in DFM and ADX and dilute the retail element.

Other changes to the infrastructure of UAE markets are also in preparation: amendments to listing regulations, encouragement of book building practices, and changes to foreign ownership limits will all serve to bring DFM and ADX more in line with global standards, and increase their attraction to institutional.

It should also be noted that if global investors so wished, they already have a market in the UAE that offers those benefits, Nasdaq Dubai. And if the structure of local markets is further streamlined, with the long-awaited consolidation of the DFM and ADX, that can surely only make them more attractive.

So there are lots of reasons to think that BlackRock is being overcautious in its scaling back, and that it runs the risk of losing out on a renewed UAE market run later this year, when the above factors come into play.

For example, two of the corporations in which it was invested, Emaar and Aldar, are really at the forefront of the UAE’s recovery. It is a brave investor who says further increases are unlikely.

It is in nobody’s interests to inflate a bubble, in equities as much as real estate, and if BlackRock’s action drives home that fact, all well and good. But the firm risks losing out on the UAE investment renaissance.


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