From The Economist---
More upheaval in an accident-prone statelet
UP LIKE a rocket, down like a stick. Dubai’s stockmarket is living up to that old investing saw: having been one of the best performers in the world since the start of 2013, it has fallen by 25% in the past two months. Volatility is par for the course. Back in 2009, the emirate ran into financial trouble and had to be rescued by its neighbour, Abu Dhabi.
This time the trouble relates to a specific company, Arabtec. The construction group, which helped to build the Burj Khalifa (pictured), has parted company with its chief executive officer, chief operating officer and chief risk officer; meanwhile Aabar Investments, a company almost entirely owned by the government of Abu Dhabi, has reduced its stake. With confidence duly shaken and with little information to guide them, investors have headed for the exits: the price of Arabtec’s shares has fallen by more than half. There must now be questions about the feasibility of a $40 billion deal to build houses in Egypt that Arabtec signed in March.
As Arabtec’s shares plunged, local investors who had borrowed money to buy them were forced to sell other holdings to meet margin calls. That was a problem for a fairly illiquid market dominated by a few stocks. Property makes up 31% of the Dubai index and financials more generally 78%.
Property prices in Dubai rose by 30% last year, a reminder of the bubble that undermined the emirate five years ago. But Neil Shearing of Capital Economics says that investors should be wary of drawing too many parallels. “Crucially, the recent rise in property prices has not been fuelled by a rapid expansion in credit this time around,” he says. Bank lending is up by around 10% this year compared with annual gains of 20-50% between 2005 and 2008.
The equity market’s recent woes could be put down to simple profit-taking. Share prices may well have been ramped up earlier this year by investors anticipating the promotion of the United Arab Emirates (of which Dubai is a part) from frontier- to emerging-market status, a move that was confirmed by MSCI, an index provider, last month. Local investors clearly hoped that promotion would spark buying by international investors, both from those who are simply tracking the index and from those who shy away from frontier markets. To invoke another market adage: buy on the rumour, sell on the news.