Since hitting a near-term peak value in early May, the Dubai Financial Market Index has fallen some 25% with investors unnerved by the speed and extent of the correction. This contrasts with Charlemagne Capital’s Magna MENA Fund which has fallen 4.5% in June1, outperforming relevant indices on the downside, whilst rising 23.8% year to date.
This correction however needs to be put in the context of the gains that the market has achieved over the past 18 months, with the market index all but trebling in value over this period. Share prices had previously remained relatively unchanged for about four years since losing around 75% of their value in the wake of the global financial crisis. Nevertheless, the market still remains some 50% below its late 2005 peak value.
Given the extraordinary gains of the past several months, largely focused on the real estate sector, some form of technical correction had been widely anticipated by investors even if the precise trigger for this correction had not been foreseen. In the event there were two triggers: the sudden prominence and success on the ground in Iraq of the hard-line Sunni movement ISIS (Islamic State of Iraq and al-Sham, with Sham referring to the Levant region of Syria, Lebanon, Jordan and Palestine), together with speculation surrounding the ownership and operations of the leading Dubai-based construction group Arabtec, exacerbated by the resignation of its chief executive. Profit taking and margin calls saw the market trade sharply lower in the wake of these developments.
The First Trigger: ISIS gains in Iraq
Neither trigger is a cause for excessive concern. The actions of ISIS in Iraq are unlikely to have an adverse impact on economic activity in the United Arab Emirates. Indeed, any increase in geopolitical risk usually benefits the stable Gulf States with consequent higher oil prices boosting revenues and attracting investment flows into the financial sectors. In any event, the advance of the ISIS forces seems unlikely to disrupt oil supplies from Iraq to any great extent, with the most significant Iraqi oil fields safely in the south of the country and controlled by the Shia-led central government.