Markets absorb reopening shock as investors retreat to cash

The DFM and the ADX saw a broad sell-off yesterday on their first day of trading following a two-day precautionary suspension after hostilities broke out across the Gulf The DFM General Index dropped 4.71% — its sharpest loss since May 2022 — while the ADX closed down 1.93%, paring an earlier 3.6% loss. Heavyweights including Emirates NBD, Emaar, and Salik hit the temporary 5% downside limit almost immediately after markets opened.

From the trading desk: The sell-off is not a reflection of shifting fundamentals, but a “purely sentiment-driven” reaction to regional uncertainty, George Khoury, global head of research at CFI Financial Group, tells EnterpriseAM. He characterized the drop as an “expected and anticipated” reopening shock where “investors react to uncertainty first.”

The expat liquidity trap: “Outflows were noticed mostly in real estate and financials names, with flows being held mostly in cash,” Khoury said. “In a country where expats play a major role, any geopolitical tension creates liquidity concerns,” he explained.

The DFM real estate index was down 4.92% yesterday, while financials shed 4.38%, according to market data. All DFM indices were in the red, except for materials, which gained 2.38%. National Cement Company was the only company that made gains (2.38%).

On the ADX, only five companies were in the green, while the majority hit the 5% downside circuit breaker, and a few remained flat, according to market data.

The counter call: Despite the volatility, Cantor Fitzgerald is urging clients to buy the dip. In a note to clients picked up by Bloomberg, our friend Kato Mukuru gave seven UAE lenders “overweight” ratings, calling them “low-risk, high-return” investments. Mukuru argues that while regional escalation brings “substantial near-term risk,” the long-term investment thesis remains anchored by the UAE’s commitment to positioning itself as a “haven” and strong economic fundamentals. Cantor is particularly bullish on Rakbank, First Abu Dhabi Bank, and Abu Dhabi Islamic Bank.

Does safe-haven status still hold? “The underlying macro fundamentals and leading company and sector profiles, viewed from a bottom-up perspective, are both resilient, so the current moves are a temporary divergence that might last till the conflict cools down,” Century Financial Chief Investment Officer Vijay Valecha said in a note seen by EnterpriseAM.

BACKGROUND- Dubai’s index rallied to a 2006 high earlier in February, while both the DFM and ADX have been attractive to investors looking for that elusive mix of both stability and emerging-markets flavoured growth. The problem now: Dubai’s equity market is the “only one among the larger GCC ones which has significant foreign ownership,” making it particularly vulnerable and exposed to foreign outflows, Hasnain Malik, an emerging markets equity and geopolitics strategist at research firm Tellimer, told the business information service.

REMEMBER- We reported yesterday that moderate capital outflows were expected, as Iran’s unprecedented strikes on the UAE spook foreign investors and expats and tarnish the UAE’s well-cultivated “safe haven” image.

What to watch

Volatility is likely here to stay, Valecha said. “Any adverse developments would negatively impact the markets, and if the situation stabilizes, dip buyers might return,” he added.

Mukuru expects the market to remain weak in the immediate term but says this “should open up some interesting [windows] for those who believe in the long-term equity story.” Meanwhile, Khoury argues that the week ahead will be “range-bound with limited upside,” as the market waits to see if regional tensions escalate or stabilize. If tensions don’t escalate, the current fear-driven sell-off could quickly shift into an “opportunistic” window for buyers, Khoury noted.