Dubai brokers still closing despite 20% stock market rally

Posted on 19 October 2010 with 2 comments from readers

Last week Mac Capital closed its brokerage operations in Dubai, making 25 staff redundant, the unlucky 13th closure of a broker in the UAE this year, and that despite a post-Ramadan stock market rally that has left the Dubai Financial Market up 20 per cent on the lows of July.

It is not very hard to see why brokers continue to make these painful decisions. Trading volumes are a tiny fraction of boom levels and commission rates very low.

Poor market timing

In the case of Mac Capital the firm launched its brokerage operations at the height of the Dubai real estate boom in March 2008 just in time for the global financial crisis in the autumn of that year. However, the Dubai International Financial Centre based firm retains its global mergers and acquisitions advisory service that is said to be profitable, so its efforts in Dubai have seen some success at a difficult time.

From Mac Capital’s perspective hanging on for a recovery in the UAE stock markets clearly did not stand up as a financial proposition. There would be the cost of continuing loss making operations while waiting for the upturn, and then doubts over whether that wait would prove worth it.

However, if you study business cycles then the closure of foreign brokerages can be seen as a classic sign of a bottoming out of an emerging market.

In the investment classic ‘Tomorrow’s Gold’ Marc Faber notes that in Phase Zero of the cycle: ‘Either no foreign brokers have established an office or they are in the process of closing down offices opened during the previous boom’.

It is surely significant that such closures still happen even though the actual stock market is showing signs of recovery. A 20 per cent rally in the DFM since Ramadan cannot be entirely dismissed, even if it is too little, too late for some brokers to justify staying in business.

Buy now or later?

Does that make UAE stocks a buy right now? ArabianMoney editor and publisher Peter Cooper argued at a conference in Vancouver this July that the local stock market was bottoming out but hesitated in concluding that this was the ultimate bottom, although he did say that stocks would probably never be lower (click here).

There is still a good reason to believe the recent UAE equity rally will correct, because global stock market valuations look very overstretched and due for a correction. When global stock markets correct so will the local stock market. But that will probably be the best time to buy UAE equities.

Thereafter, as Peter Cooper outlined in a speech to the Australian Business Council yesterday, the UAE faces a strong recovery as global inflation rises and pushes up the oil price. That would take a while to become an established trend as any serious fall in global financial markets will also hit commodities initially.

But if you believe the Fed will be true to its word and flood the world with money in another crisis, then the consequences are obvious enough, and a rapid increase in UAE oil revenues would fuel up the local economy. A stock market boom would be among the first signs of this, perhaps as soon as this time next year.