x Abu Dhabi, UAEMonday 24 July 2017

Slow shift in UAE markets, but debt yields prod investors

The global trend of moving out of bonds and into stocks has been slower to take hold in the Middle East so far.

Traded value on the Dubai Financial Market surged to a peak of Dh672m on January 10. Pawan Singh / The National
Traded value on the Dubai Financial Market surged to a peak of Dh672m on January 10. Pawan Singh / The National

The global trend of moving out of bonds and into stocks has been slower to take hold in the Middle East so far.

But that should change as investors realise the opportunities emerging in equities markets, say brokers. It comes amid a strong rally in stocks on the back of better earnings and healthy dividend payments by companies. The Dubai Financial Market General Index has surged almost 19 per cent since the start of the year, while the Abu Dhabi Securities Exchange General Index has advanced more than 15 per cent.

"There is a lot more interest now coming in," says Saleem Khokhar, the head of equities at National Bank of Abu Dhabi. "Particularly with the institutions. They recognise that the opportunities that are available in the equity side are greater than in fixed income."

The surge in interest comes after Dubai credit default swaps (CDS), or the cost of insurance of Dubai debt, have tightened, making yields on equities a more compelling case for institutional investors. In the Arabian Gulf, investors in debt are commonly institutions, rather than retail or high-net worth individuals. CDS levels breaking the 350 basis points mark in June was an affirmation for brokers that confidence was back as clients showed appetite for several Dubai stocks that have not been trading for some time. The CDS levels are currently at 231 basis points.

"The improving CDS, especially for Dubai, was a good signal that equities will follow," says Anastasios Dalgiannakis, the head of institutional sales trading at Mubasher Financial Services, a regional brokerage in Dubai. "Some money is being deployed to equities because debt yields are at record lows, and secondly some companies that have benefited from a cheaper cost of funding have rewarded their shareholders and increased the value of their stock."

Current CDS levels are minute compared to a peak of 655 basis points in November 2009 as credit risk worries heightened after the Dubai Government announced a standstill on debt held by Dubai World. The event prompted a series of defaults on mortgage loans, cutting access to credit and rounds of layoffs and restructuring for both the property and banking sectors.

But since then, signs of recovery have emerged across the UAE economy, underpinned by high oil prices and strong consumer and business demand from the region.

Brokerages, whose bread and butter income is from trading commissions, have benefited from a significant rise in market activity. Traded value on the Dubai Financial Market surged to a peak of Dh672m (US$182.9m) on January 10. That compares with a daily average traded value of Dh218 million for the past year. The figures are still markedly below a peak of Dh2.95 billion traded on June 1, 2009.

Tumbling volumes forced 23 brokerages to shut down last year. Many of the independent securities companies have had their capital replenished and maintained the bare minimum as required by the market regulator: a trading manager and two brokers. There are today 50 brokerages in operation from a peak of 103 more than two years ago.

"The market has started moving and it seems the consolidation has stabilised. With more liquidity in the banking system, it seems they are opening up their credit products to other categories, like ours, which were not listed by the banks," says Sherif Abu Noor, a broker at Global for Shares and Bonds in the capital.

halsayegh@thenational.ae