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DFM up 93% with best performance this year since 2005 but will it crash next like in 2006?

Posted on 05 December 2013 with no comments from readers

The Dubai Financial Market General Index is up 93 per cent year-to-date making it the world’s top stock exchange again, a crown it last held in 2005 when the index advanced 102 per cent.

However, in January 2006 the DFMGI started a long plunge down and lost 85 per cent of its value in a bear market that only finally hit rock bottom in January 2012.

Welcome to the wonderful world of volatile emerging market stock markets. They are incredibly difficult to invest in successfully. Our sister ArabianMoney investment newsletter (sign-up here) advised buying in July 2010 and waiting for the recovery whatever happened to share prices in the interim period.

Successful strategy

That strategy worked. You would have tripled your money in three years taking this advice. But you needed to have nerves of steel and be totalled convinced about an investment at a time when even the truest believers had given up all hope.

We recall repeating this strategy to a meeting of the Austrialian Business Council in November 2011 and being cornered afterwards by a brokerage owner who had just shutdown his business following massive losses. To put it politely he disagreed with our strategy. It was two months before the market hit bottom and started its remarkable recovery.

OK so we got something right. What about the outlook today for the DFM and by extension its federal partner the Abu Dhabi Securities Exchange? Is there a possibility of a repeat of the 2006 crash?

The answer has, unfortunately, got to be quite probably yes. Any financial market in a huge price spike tends to have a very big correction in the opposite direction. It’s to do with buyer exhaustion. Bascially everybody piles into the favorite asset of the moment until there is nobody left to buy, and then the price falls back due to a lack of buyers.

Then you also have to consider what could pick the bubble of optimism in the UAE financial markets? A sudden fall in the price of oil due to a deal with Iran? Well we do have one on the table for signature in six month’s time. Or perhaps the Federal Reserve could lose control of interest rates and global bond markets crash?

US mortgage rates are already a third higher than a year ago. The Fed does not need to ‘taper’ the markets are already doing it for them, although markets are currently focused on the winding up of the QE money printing program.

Rising interest rates

That would make money far more expensive and reduce speculation in stock markets at a stroke. Global stock markets are vulnerable at all-time highs with the global economy tepid at best.

True the DFM is still trading at a 60 per cent discount to its 2005 all-time high. If the wind stays fair in global financial markets then there is plenty of room for prices to go up and up.

Still we can understand those players who sold on the news of Dubai winning the Expo 2020. That was perhaps the point of maximum enthusiasm and optimism in the market.

Won’t the reality of 2014 be higher global interest rates, a downturn in global trade, recessions in many key global economies, less air travel and tourism, crashes in major financial markets, lower house prices and higher unemployment and inflation? Spot the headwinds coming this way…

Posted on 05 December 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, GCC Real Estate, GCC Stock Markets, Global Economics, Hedge Funds, Investment Gurus, Sovereign Wealth Funds, US Stocks

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