x Abu Dhabi, UAEMonday 22 January 2018

Markets weighed down by corruption

Bogus fund probes may ultimately strengthen the emirate's economy, but so far the Dubai saga rocks the stocks with no end in sight.

Although the rash of corruption probes and fraud charges in Dubai may ultimately strengthen the emirate's economy, the pall the investigations have cast over the market is unlikely to lift soon. The most recent sign the investigations may still be gaining momentum was yesterday's allegations by prosecutors that Abid al Boom, an Emirati businessman, ran a bogus investment fund that fraudulently took Dh846 million (US$230m) from thousands of investors. While the alleged scheme appeared to be separate from other probes rocking Dubai's business circles, the press conference held to explain the charges made clear the Government's determination to push forward in the emirate's biggest and most public anti-corruption drive in memory.

This followed an announcement by the Dubai Public Prosecutor's office that another press conference to announce further details into ongoing anti-corruption investigations, planned for Thursday, had been postponed. "We do not have any information to release to the public at this time," said a prosecution spokesman. The latest word from authorities is that a press conference will be held at the conclusion of the investigations to provide more information to the public. Public prosecutors said investigations were still in the preliminary phase and that police were looking into the alleged financial improprieties.

The Dubai arrests started in April, when Zack Shahin, chief executive of Deyaar Development, was detained over allegations of "financial mishandling"; he subsequently resigned, along with two more Deyaar boardroom members. Mr Shahin denies any improprieties. Days later the probe spread to other companies, with the managing director of advertising agency Masterbrand detained over allegations of embezzlement at Deyaar; while officials at Dubai Islamic Bank, JPMorgan Chase and property developer Sama Dubai were arrested, as well as the former chief executive of mortgage provider Tamweel. All of the companies that they are not under investigation and the charges against the executives will not affect their performance.

Some investors and analysts say the wave of investigations may bolster the credibility and integrity of the emirate's regulatory framework, legal structure and business culture. In the shorter term, though, the investigations and a legal process that shrouds information from the public has created just the sort of uncertainty most investors strive to avoid. Ingmar Burgardt, regional managing director of BHF Bank, has around Dh2.2 billion invested in the UAE. He said he immediately sells any shares of the companies whose executives have been accused of wrongdoing. He doesn't even consider whether the accusations might affect the performance of the company: "It's our investors' portfolio and we have to be careful that we only take market risks and don't get involved in any company collapse."

Markets rose yesterday. The DFM was up more than two per cent, recovering earlier losses. After falling earlier in the week, Emaar bounced back by 5.67 per cent. Tamweel was also one of the leaders, rising by 5.18 per cent. But the investigations have weighed on UAE markets in recent weeks, especially the shares of property companies. From April 16 until yesterday, the main listed companies whose executives have been accused in the investigations have seen their share prices plunge. Deyaar has fallen from Dh2.35 to Dh1.88; Dubai Investment Bank is now at Dh7.19 after touching Dh9.5 in April; and Tamweel hit Dh5.89 after reaching Dh7.45 on the day the first arrest was made.

Overall the property and construction sector on the Dubai Financial Market has fallen by 14.4 per cent since the allegations and arrests started in April; the Abu Dhabi stock market's property sector has fallen in value by 19.53 per cent; and DFM materials companies have plunged by 28.07 per cent.The DFM has fallen 12.93 per cent in that time and the ADX 10.62 per cent. It is not just allegations of corruption hurting the local markets. Foreign investors have generally been pulling back from emerging markets; they have been heavy net sellers on local exchanges. Meanwhile, a regulatory change in the Saudi Arabian exchange, the Tadawul, has opened to foreigners for the first time, encouraging some investors to pull money out of other GCC markets to allocate more to Saudi.

Mohamed Ibrahim, a market analyst at the National Investor, said institutional investors might simply wait until the investigations run their course before making any decisions. "With institutions, you can expect the arrests to be very disheartening and a blow to confidence, especially as the UAE has been trying to sell the market and the region as the opposite of this," he said. Many are unlikely to expand their positions just around Ramadan.

While international investors have indeed been taking capital out of the GCC over the summer and moving it to seemingly safer shores, Mr Burgardt said there has also been intra-GCC movement which has hurt the UAE. For example the Saudi Tadawul market's decision to allow foreign investors prompted a shift in capital between the countries, leaving the UAE and entering Saudi Arabia. Institutional investors have apparently held on to their positions much longer, according to Mr Burgardt. One large financial services firm he had been talking to was concerned about the size of the market crash because its next investment committee meeting was not until after Ramadan, so was unable to make any moves until then.

Yesterday traders attributed the market bounce to bargain hunters moving in to acquire shares at attractive valuations. @Email:afoxwell@thenational.ae