Tuesday, November 29, 2005

Massacre on the trading floor!

The last couple of weeks has been brutal for the stock markets in the UAE. Yesterday (Nov. 28) alone, the Dubai market went down more than 3%, the cumulative losses to date approaches 15%, the correction is well underway, and the trend is continuing!

What is absolutely noteworthy, is how fearful and dejected everybody around is about the stock market slide. Taken with a pinch of salt, the markets still made stratospheric gains this year, and has pushed valuation to a ludicrous level, just imagine, I have heard CEOs saying "My company is not worth that much".

The main cause of this slide was not a sudden awakening and re-acquaintance with investing sense, it was a movement of liquidity (mainly from other GCC speculators) towards other opportunities. That showed how much the liquidity and the demand on instruments rather than underlying assets influences this market.

I think there are several deficiencies in this market that are making it more exposed to wild swings and boom and bust cycles.
First of all, around half of the shares listed in both Dubai and Abu Dhabi are nearly never traded, that makes the market a hostage to handful of wildly swinging stocks. I think that the authorities should make sure that listed securities are liquid through a specialist market maker system. For example, Mashreq bank is one of the stars of the banking sectors, but is almost never traded as most of its stock is closely held. I think that the investment community can be better served if guaranteed access to the leading stocks is assured.

Second, the physical setup, open cry and current broker system encourages speculators who place themselves on the floors and brokers who service them without any value added. A move toward complete electronic trading will force rationalization, will force brokers to invest in better staff, facilities and customer service, and will distance speculators for the rumour mongering at the DWTC as it is right now.

Third, I think that the disconnect between the Dubai and Abu Dhabi exchanges is not serving the market or the investors. While the historical reasons for the existence of the two exchanges are clear, their continued rivalry is illogical. If they both turn to electronic trading, a merger will make total sense without any loss of face. If that is not politically possible, I think that Dubai Financial Market should move most of its listing to DIFX, the rest to Abu Dhabi, and go to international level exchange in one swoop.

I can list 10 more shortcomings, but I think I made my point, it is wild west situation right now, and while we can all preach about fundamental analysis and core investment values, structural changes have to be made to make the market and thus the economy less prone to boom and bust cycles.


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