Dubai World restructuring has taken a positive note yesterday and today with the news of meetings with creditors and possible proposal for the debt restructuring in place. More good news came in this morning when the Dubai government made a statement of loyalty by pledging $9.5 billion to assist Dubai World in its restructuring.
So the market is in a frenzy. The index has risen over 1800 with strong volumes. Over the past week it has been local (NYSEARCA:GCC) retail and institutions buying, but after the news broke out this morning there was an influx of foreign flows to the index. The most affected sectors are real estate (e.g. Emaar), construction (e.g. Drake & Scull), and banks (e.g. ENBD).
There is a feeling of jubilation and stress-relief after there was a lot of speculation on what might happen with Dubai World.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett
At the moment I think there is a greed pig fest going on, with the Dubai Index having recorded a steep rise in values and valuations, in a very short time period. Even with this run up we are still at lower levels than the beginning of the year. And for good reason. Actually for good reasons. Seven of them which I intend to share with you at the moment.
- Dubai World/ Nakheel: Although a lot seems to have taken place in the past few days, the Dubai World/ Nakheel fiasco is still in its infancy, and although the committee put together, of the 6 largest creditors, has possibly agreed to the conditions put forth, there is still the fact that Dubai World/Nakheel and Dubai in general is not as strong financially. This means, that any of the tranches coming due this year will put a hamper on the advancement of the market. One payment done this year (or we are hoping that March 30 will go without incident after all this hubbub). But there are quite a few loans maturing this year as well. Caution is key this year...
- Arabtec-Aabar deal: The financial crisis has made consolidation a must. Synergies must be created from this very fragmented market. Even in the construction sector. Although Arabtec and Aabar have talked heavily about reaching an agreement, I find it negative that they extended the talks further till 3rd week of April. Why do I find it negative? Well, I really think the initial terms were too lenient and now Aabar is discussing being a bit more strict with its feeding hand. And we are talking about major dilution of profits to shareholders here. If Arabtec shares take a nosedive, which it might, Dubai index will suffer.
- 1st Quarter Numeros! : It seems that markets the world over have been moving from reporting date to reporting date and investing based on sentiment. The fact of the matter is that we invest because we believe in growth. Now, if quarter numbers dissapoint, or not even that; if 1st quarter numbers are similar to 4th quarter numbers the Dubai index will suffer. At current valuations, the dubai index might have reached a plateau and should make a correction. Until earnings growth is shown I find even single digit P/Es expensive.
- Assets, uuhh, I mean real estate...: What got us all into this mess anyway? That's right. The property market. What will get us out of this? Well, no, not totally the property market. But it does have a contributing effect to the recovery. And at the moment the 'bottom' has not been reached in real estate prices, and that will dampen the Dubai index's advancement.
- Population: The exodus experienced in 2009 was the first negative growth year in population in the UAE, with Dubai contributing largely. Although some sources (some even official ones) state that there was population growth in 2009, I find myself doubting it. I was in Dubai last December and I was there last May. There were definitely much less people second time around. When there is population growth in Dubai, it is understood that the expat population is returning (because Dubai is made up mostly of expats), and that is usually a sign that business is resuming.
- Hotel rates: Now, when you read that hotel rates are much lower than they were pre and post crisis, you start to wonder what kind of state the economy is in. According to the Dubai Statistics Center: "Tourism indicators included hotel occupancy rates and air travel statistics. According to the figures, the room occupancy rate at the end of the second quarter of 2009 fell to 72 per cent from 81.5 percent at the end of 2008." I do not want to throw off my readers by talking about the economy too much when the main focus is the heading the index will take in the coming 10-12 months. However, I think the green shoots are not here, and therefore the market is overpricing the good news coming out. Oh and occupancy fell while room rates did as well (?)
- Oil: Oil has been on a fantastic run/walk since the bottom last spring (2009). And although it seems to have stabilised around the 70-80 dollars a barrel range, I find global economic cues having dire effects on that price as we go forward. Now let's not get disillusioned here, Dubai doesn't have much of it anyway. The sentiment is what matters. Oil down. Middle East down. Dubai equals Middle East for many international investors. I see oil coming down from its high perch to settle either in the lower 70s or higher 60s by this summer. That will put pressure on budgets and Dubai has a big budget problem anyway.
Disclosure: Long ENBD, Long EMAAR