UAE stocks are recovering, but the rally is still trading on peace

UAE equities are clawing back their war losses as easing geopolitical tensions pull investors into some of the region’s most heavily sold stocks. Dubai’s benchmark gained around 7.4% in 2Q 2026, putting it on course for its best quarter in a year and largely erasing its 2026 losses. Abu Dhabi also recovered, though by much less.

What’s driving the rally: “This rebound can mainly be attributed to a reversal of geopolitical risks in the region, as the region’s fundamentals have remained strong despite the tensions,” Century Financial CIO Vijay Valecha tells EnterpriseAM UAE. The easing of concerns around the Strait of Hormuz helped investors move back into riskier assets, CFI financial market analyst Christy Achkar adds.

Volatility remained elevated in 2Q, Achkar says, but markets became more resilient as fears of a broader regional conflict eased. “Overall, 2Q marked a shift from risk avoidance toward gradually improving investor confidence,” she adds.

But this is not purely a peace trade. Resilient earnings from major banks and real estate companies, continued foreign participation, and confidence in the UAE’s longer-term outlook have helped the rebound hold, Achkar says. “While geopolitical developments triggered the rebound, the market has been able to sustain it because the underlying fundamentals remain strong.”

The recovery, by the numbers: The DFM General Index (DFMGI) gained around 10% over the past three months and nearly 13% from its March 16 low, while the FTSE ADX General Index (FADGI) rose around 2% over the quarter and 4% from its March low. Both also extended their gains over the past month, with the DFMGI up around 3% and the FADGI up 1.6%.

But we’re not back to normal: The DFM remains around 12% below its pre-war high, while the ADX is still about 9% lower. The recovery has repaired much of the damage but has not yet fully reversed the discount investors attached to regional security risk.

The backdrop

The economy bent, but didn’t break: The UAE’s PMI fell from 55 in February to 52.9 in March and 52.1 in April before edging back up to 52.6 in May. It remained above the 50 threshold separating expansion from contraction throughout the disruption, meaning growth slowed but never reversed.

IN CONTEXT- Before the war, business activity was growing at its fastest pace since April 2024, with construction, real estate, logistics, and technology supporting stronger output. The economy’s underlying engines were interrupted rather than dismantled — making it easier for equities to bounce once the security premium began fading.

The state cushion matters: Valecha points to the CBUAE’s AED 1 tn asset base, which has supported measures including a five-pillar resilience package launched at the start of the war to give banks greater access to reserves and additional AED and USD liquidity, followed later by a AED 31 bn liquidity injection. He also cites the government’s liquid assets — estimated at around 200% of GDP — as a buffer against short-term fiscal and economic volatility.

That resilience is also reflected in the medium-term outlook and sovereign ratings: The IMF has recently lifted its 2027 UAE growth forecast to 5.3% from 4.7%, Valecha notes, while S&P Global expects growth to average 6% in 2027-2029 as oil production and tourism recover. Moody’s has also affirmed the UAE at Aa2 with a stable outlook, while Fitch has maintained Abu Dhabi at AA — suggesting the shock has weakened near-term growth without undermining the country’s credit strength or recovery prospects.

Dubai fell harder — so it’s bouncing faster

Why Dubai was hit more: Dubai’s market leans heavily on tourism, aviation, real estate, and global capital flows — sectors particularly sensitive to flight disruption and any threat to the city’s safe-haven status. Dubai slipped into bear-market territory in March as the conflict rattled an equity market that had previously logged five straight annual gains.

Why Abu Dhabi held up better: The ADX benefited from “backing from sovereign wealth funds and diverted oil revenues,” as well as a more defensive mix of listed companies, Valecha says. It therefore had less ground to make up once the war premium began easing, explaining the smaller rebound from its March low.

The rally has been broad: Thirty-four of the 41 stocks in Dubai’s benchmark rose during 2Q, Bloomberg reports. That breadth suggests investors were not simply rotating into one or two defensive names but buying across much of the market as sentiment improved.

The most beaten-up stocks came back first

Consumer, energy, and aviation all led Dubai’s rally: Consumer discretionary stocks gained nearly 49% from the March 16 low, with Talabat rising around 60% during the quarter, Valecha tells us. Industrials advanced around 19%, supported by Salik, Air Arabia, and Parkin, while communication services gained roughly 15%.

Abu Dhabi’s leaders: Real estate returned more than 16% from the March low, followed by industrials at around 15% and energy at nearly 13%, Valecha says.

Energy could be next: The reopening of the Strait of Hormuz has reduced fears of supply disruption, restored confidence in regional export flows, and helped normalize shipping and operating conditions, Achkar says. That should improve the sector’s outlook if the waterway remains open and export bottlenecks continue to ease.

Real estate has been more uneven: The DFM Real Estate Index rose only around 5% from the March low, although Emaar Properties rebounded roughly 20%. The stock remains around 30% below its previous high and offers a dividend yield of about 8.2%, which Valecha describes as “incredible value” for one of Dubai’s flagship listed companies.

Fast money is already wagering on peace

The first movers: “When a credible ceasefire takes hold, investors start to undo their caution, but gradually rather than all at once,” Valecha says. Hedge funds and trend followers tend to move first, unwinding hedges and buying beaten-down assets before a formal agreement is signed.

“Fast money moves first,” he adds. “The war premium starts coming out of the most beaten-up assets before anything is even signed.” Brent’s retreat toward its pre-war range is one early example of that repositioning, Valecha says.

Slower money waits: Pension funds, insurers, and more cautious retail investors typically want confirmation before rotating out of USD, US Treasuries, and gold and back into regional equities, emerging-market debt, and cyclical stocks. That second wave would be crucial to turning the relief rally into a more durable recovery.

But the rally can reverse just as quickly

This is still a binary trade: Dubai’s market rebounded as peace talks progressed but “could as well reverse pretty quickly” if the interim accord falls apart, Fiera Capital fund manager Dominic Bokor-Ingram told Bloomberg. His longer-term view on Dubai remains positive, but the immediate trade still depends heavily on the war actually ending.

What renewed conflict would do: “Volatility [would spike] sharply rather than gradually,” Valecha says. It would force rule-bound risk-parity and volatility-targeting funds to cut exposure, while “safe-haven demand, fears over energy supply, and commodity-driven inflation” would put pressure on growth assets.

Retail is the wildcard: “Some panic and sell at the worst point, while others pile into the dip without fully pricing in the risk,” Valecha says. Because retail flows tend to be driven more by headlines and emotion than investment mandates, they can amplify moves in either direction.

What to watch in 3Q

Valecha sees potential in “fundamentally strong, high-dividend names” across banking, ins., tourism, and real estate. But the risks haven’t gone away. Valecha flags near-term operational bottlenecks in oil exports and security disruptions as the things to watch — specifically, whether Hormuz shipping traffic normalizes through 3Q without incident and whether the interim ceasefire holds through the next round of talks. A reversal on either front would risk an uneven sectoral recovery and weigh on the UAE’s credit profile.