Dubai Stock Market Looks Vulnerable: Effect on Oil Prices

The Dubai Financial Market has been enjoying its longest winning streak since April 2005 with stocks yesterday holding above the 2,000 level and up 32 per cent this quarter.

Other regional bourses are also strongly up: Doha by 51 per cent although Kuwait is down 2.5 per cent. The immediate cause is a surge in oil prices to almost $70.

Oil prices

But this is something of a repeat of last summer when surging oil price speculation produced a spectacular $147 peak in July, only to be followed by a slump to just $32 in December. Will history repeat itself and drag local stock prices back with it?

Oil prices can also act as a break on the local economy, as the 50 fils increase in diesel prices in Dubai today reminds us. For the green shoots of global economic recovery it will likely prove fatal.

The oil price hike is undoing the entire impact of all the global bailout and stimulus packages since last autumn. It is a huge burden for a chronically weak global economy.

Therefore it will tend to be self-correcting as too high oil prices will hit business and consumers and reduce demand. And as the oil price comes back down the burst of enthusiasm in regional stock markets will be replaced by rapid profit taking.

Indeed, Gulf stock markets have been laggards in the recovery of emerging stock markets and are only up by 1.2 per cent year-to-date compared with 33 per cent for other emerging markets.

Dubai stocks cheap

A broker report from Merrill Lynch said Dubai stocks are the cheapest in all emerging markets. That has certainly left room for a strong rebound, which has happened. And there is still room for Dubai equities to move higher before a correction.

Most market commentators expect big local investors to cash out before the end of the month when they depart for their usual July and August holidays. That would leave the international funds commanding the market which is generally thinly traded in the summer months.

However, the most likely cause of an immediate decline in the DFM is an end to the 13-week Wall Street rally and a flight to safe havens like bonds, the US dollar and precious metals.

Comments

[raytaythemd:]

...well, it COULD go this way!...OR!...it COULD go that way!...OR!...it COULD go BOTH ways!!...gee, Pete, maybe you need to go see the wizard and get yourself a brain...

Jun 08 08:31 AM

[RiskReturnO...:]

No need to buy GCC stocks, as it's risk-return profile in not attractive. Volality in crude oil is expected to be high, with low US demand offset by China growth; speculative money is chasing crude oil, but this time it will peak out much sooner than last year. Dubai is still suffering from hangover of over-investment ... property values are failling, immigrants are going home ... not good prospect.

For those wanting exposure to oil, best strategy is to go long XLE (as it has only priced in crude oil in the $55-$60 range, so you have lots of downside protection from correction in crude).

Jun 08 07:57 PM

[Peter Cooper:]

It dropped 4.5% - so why bother to comment.


On Jun 08 08:31 AM raytaythemd wrote:

> ...well, it COULD go this way!...OR!...it COULD go that way!...OR!...it
> COULD go BOTH ways!!...gee, Pete, maybe you need to go see the wizard
> and get yourself a brain...

Jun 09 01:12 AM