Q3 results from the UAE disappoint investors, what next?

The third quarter results from quoted companies in the UAE have disappointed investors who have pushed up their share prices in a rally since Ramadan. The problem is that the companies traded on local bourses are mainly in banking, construction and real estate.

If only the oil sector was represented then the Q3 results would look a lot brighter, or if trade, tourism and aviation were available as local stocks. Perhaps one day some of the governments will decide on partial privatization of some of these sectors. This would certainly give the rest of the stock market a lift.

Banks struggling

For the moment though banks are still struggling with the aftermath of the real estate crash and higher bad loan levels and provisions. The retail banking market is also fairly depressed with customers in saving mode rather than taking out new personal loans and credit cards.

The large loss at Aldar Properties was expected but has led to a lot of speculation about the size of the bailout the group may need from Abu Dhabi and what that might mean in terms of share dilution. This has also been a wake up call for those who might have thought Abu Dhabi lived on a different planet from Dubai and so had avoided the real estate crash entirely.

In practice Abu Dhabi’s real estate development program was benchmarked to Dubai prices and these have fallen by at least 30 per cent, and new property sales have also dried up. Thus the financial models of the major developers are in a mess with far larger than expected working capital requirements as huge schemes are built out.

Cash flow low

It is hardly surprising then that the quoted construction companies have reported a crash in profits with projects delayed and cash flow running short. Quite where quoted companies go from here is the next question.

Prospects from an immediate pick-up do not look good. There is always a time lag between higher oil prices and a pick-up in trade and then the impact on demand for housing, offices and shops. And such is the level of oversupply, with more being finished almost daily, that this is clearly going to take longer than in the past.

That said from the point of view of buying shares the best time to buy is when the perceived outlook is worst, the time of maximum pessimism. It may be that this time is not far away as the light on the horizon of even higher oil prices as QE2 starts printing dollar bills is at least now visible.

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