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Speculators back in Dubai stock market

A surge in shares of Amlak Finance since they returned to Dubai’s stock market last month has raised concerns about a new wave of unbridled speculation on one of the region’s biggest exchanges.

The Islamic mortgage lender has soared about 150 percent since it restarted trading in early June after a six-year suspension due to debt problems.

At its latest close of 2.52 dirhams, the stock is far above levels considered fair value by fund managers, many of whom put its value well below 1 dirham.

But this has not deterred the retail investors who dominate markets in Dubai and most of the region. Amlak accounted for 45 percent of total traded value on Dubai’s bourse in June, eclipsing much bigger blue-chip banks and property developers. The stock remained Dubai’s most active in the first half of July.

This is potentially a worry because it carries echoes of last year’s bubble in the shares of Dubai builder Arabtec .

Arabtec dominated trading volumes as it more than tripled in 4-1/2 months, before crashing 60 percent in six weeks, partly because many investors’ positions were leveraged. Arabtec’s plunge spread through Dubai’s market, causing the main stock index to tumble 31 percent from peak to trough.

“Obviously, given the (Amlak) price action it is a concern for some investors,” said Amer Khan, senior executive at Dubai’s Shuaa Asset Management.

The Arabtec saga highlighted the pitfalls of investing in Gulf stock markets, which benefit from strong economic growth but can be exposed to heavy speculation by retail investors. Individual investors accounted for 80 percent of total buying and 82 percent of total selling in June, according to data from the Dubai Financial Market.

Institutional investors express much the same bemusement over Amlak as they did over Arabtec last year. Shehzad Janab, head of asset management at Dubai’s Daman Investments, said he could see no logical reason for Amlak’s current value.

“One can argue that Amlak became the darling of the speculators as it rose parabolically during the month of June with no justification based on any traditional valuation metric i.e. price-to-earnings, price-to-book value, etc.,” Janab said.

In a statement last month, Amlak said it had no material information that could explain its share movements.

Stock market officials are trying to make the Dubai market more stable by increasing the participation of institutional investors.

Last year, the Dubai exchange was upgraded to emerging market status from frontier market by index compiler MSCI, attracting the attention of more fund managers and analysts.

But the Amlak saga suggests there has been little impact on trading patterns so far.

That is partly because most new foreign investors attracted by the MSCI upgrade are passive funds which merely track indexes and because local regulations do not allow short-selling, which might have had an impact on Amlak’s gains.

Buyers of Amlak appear to have two justifications. One is that since Amlak was suspended in 2008, the emirate’s main stock market index has risen 109 percent; a similar rise would put Amlak at 2.13 dirhams.

Also, Amlak has a big state-linked shareholder in Emaar Properties, which owns 45 percent. This has raised investor expectations that Amlak might win business from Emaar, just as they bet Arabtec would ride on the coat-tails of Abu Dhabi’s wealthy Aabar Investments, a major shareholder.

But Amlak still looks expensive. It is trading at 182 times 2015 earnings, based on an estimate by Dubai’s Arqaam Capital. Dubai’s market is at 13 times 2015 earnings.

Dubai is now valued more conservatively than it was at the start of the Arabtec crash. In mid-2014, it was above 20 times forward earnings. So any slide by Amlak might not be as damaging.

Also, low oil prices and regulators’ efforts to enforce brokers’ compliance have caused partial deleveraging of the market, brokers say, though there are no publicly available figures on margin trading.

“I’m not of the view that UAE equities are in a bubble. This (Amlak) is a confined case,” Shuua Asset Management’s Khan said.-Reuters