x Abu Dhabi, UAEFriday 21 July 2017

Gulf markets rally running out of steam

Analysis Expect a double-digit correction as a slump in summer trading and little improvement in the wider economy spark selling across key sectors.

DUBAI // Gulf stock markets could suffer a double-digit correction as a slump in summer trading and little improvement in the wider economy spark selling across key sectors, analysts said. The rally ? four of seven markets are at 2009 highs in rising volumes ? is unlikely to be sustained, not only because stocks are overpriced but because the economic downturn is expected to send many wealthy expatriates home for good.

"I think we're looking at a serious round of profit taking before the end of June," said Sanyalaksna Manibhandu, Emaar Saudi Financial Services head of research. Gulf exchanges have rallied strongly since March 1, with Qatar's index surging 70 per cent, Saudi Arabia rising by 37 per cent and Kuwait up by a nearly a third. Dubai has added 28 per cent and Abu Dhabi 15 per cent, while the smaller Oman and Bahrain indexes have climbed 17 and 2 per cent respectively.

"In a normal situation when an economy is good, one would expect some profit-taking and consolidation after such a big move," said Azam Braikan, Saudi-Swiss Securities head of brokerage in Riyadh. "So with the credit crunch and the global economic crisis, it's fair to say stocks are overbought and that prices don't reflect earnings." The region's recent gains mirror advances in international exchanges and were bolstered by oil's recovery from a low of $32.40 last December to near a seventh-month high of about $68 a barrel on Wednesday.

Rising crude prices bolster state revenues in the Gulf, the world's most important oil-exporting region. Global risk appetite has been rising and the safe-haven dollar has slumped as investors largely discount gloomy outlooks from economic sages including Nobel-prize winning economist Paul Krugman and former Federal Reserve chairman Alan Greenspan. But world stocks slipped on Wednesday after job losses in the US dampened hopes of a swift economic recovery.

"The global equity rally has not been supported by fundamentals and was based on a false premise that a rally on Wall Street would bolster Main Street and we're not out of the woods yet," said Sunil Dhall, vice-president at Gulf Baader Capital Markets in Muscat. "Gulf markets can move independently to an extent, but if global equities plunge, then our region will not be insulated." June will be a crucial month for the Gulf, with the school year ending and thousands of expatriates returning home, while many locals are likely to sell stocks before escaping for the summer.

This may be a usual phenomenon, particularly in the United Arab Emirates where foreigners make up about 80 per cent of the population, but the difference this time is that many of the people leaving are not expected to return. "We won't know the truth until September or October when these people would have been due to return," said Mr Manibhandu. "Of course, some will be replaced by new migrants, but if they come on lower wages than this will affect spending and the wider economy as well property rents."

Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading, does not foresee trading suffering its usual seasonal slump. "It's very easy to call a correction after a rally, but I think the market will move sideways over the summer," he said. *Reuters