MIDEAST WEEKAHEAD-Dubai stock market booms again - cautiously
* Sovereign CDS back down near pre-crash levels
* After bonds and real estate, stocks start recovering
* Rising turnover shows retail investors returning
* But continued rally will depend on Q4 earnings
* Valuations could restrain market down the road
DUBAI, Jan 16 (Reuters) - Mohammad Jamal, a veteran investor in Dubai's stock market, switched to trading commodities several years ago as the global financial crisis struck. But in recent months he has started putting money into stocks again.
The 40-year-old Egyptian, who runs a commodities trading operation in Dubai, thinks the market has bottomed out after a five-year slump and that real estate and banking stocks look particularly attractive.
"The downturn is almost over and the only way to go is up," he says. "Things are not back to how they were in 2005, but they're better than 2008."
Dubai's main stock index lost nearly three-quarters of its value in 2008 because of the global crisis and the bursting of a bubble in the emirate's real estate market. The index has largely moved sideways in the past four years as companies and investors licked their wounds.
But over the last several months, much of the confidence of both local and international investors has returned, as companies have made progress restructuring billions of dollars of debts, property prices have started to rebound, and a tourism boom has lifted the economy.
The improving mood has been seen in plunging yields on Dubai bonds and in the credit default swaps used to insure against the possibility of the government defaulting; CDS have dropped very near levels seen before the crises struck.
Now there are signs that stocks have entered their own recovery. The index rose 19.9 percent last year and is up 7.3 percent so far in 2013, while trading turnover has in the last couple of weeks hit its highest levels in nearly a year.
The rise in turnover suggests many individual investors like Jamal, who left the market in disgust during its crash, are coming back.
"We've seen credit rally and real estate recover," said Anastasios Dalgiannakis, institutional trading manager at Mubasher, a regional financial services firm.
"The only asset class lagging was equities, and people are finally putting their money here."
Nobody is predicting any quick return to the market's pre-crash heights. The index, which ended Wednesday at 1,741 points, is still a whopping 72.5 percent below its 2008 peak.
And while trading turnover has reached 500 million shares on some days this month, it has not come close to levels of around 1 billion shares seen a few years ago. This suggests a degree of caution remains.
Nevertheless, analysts say the fledgling recovery of the real estate market means the stock market is on a stronger footing than it has been at any time in the past five years.
Property stocks are heavily weighted in the index, and because an estimated 40 percent of bank lending in the United Arab Emirates is to real estate firms, bank shares are very senstitive to property prices as well.
A boost to confidence in real estate came in November when Dubai's ruler, Sheikh Mohammed bin Rashid al-Maktoum, announced plans for a huge tourism and retail development including the world's largest shopping mall. It is not clear when the project will be completed, or whether all of it will end up being built, but the plans fanned interest in the sector.
Another positive factor is the efforts of Abu Dhabi, a neighbouring member of the United Arab Emirates, to engineer a state-backed merger between its two top property developers, Aldar Properties and Sorouh Real Estate.
By allowing better coordination of residential property projects, the merger, which is still under discussion, could support real estate prices in Abu Dhabi and thus have a beneficial effect on Dubai's property firms and banks too.
"The UAE's general macro picture is getting better - a potential positive trigger that can affect the UAE is the merger between Aldar and Sorouh," said Ali Adou, portfolio manager at Abu Dhabi's The National Investor.
"The more important aspect is the outcome of it and how it will affect the real estate sector, and what business lines the merged entity will operate. The other trigger is the improvement in Dubai from a debt perspective."
The extent of the stock market's confidence could be seen in its calm reaction to news at the end of last month that the UAE central bank was placing caps on mortgage lending, to reduce the risk of another property bubble developing.
Shares in Emaar Properties, Dubai's largest listed property developer, initially dipped but quickly resumed rising and are up 8.8 percent so far this year, after a 46 percent leap in 2012.
Amer Khan, fund manager at Dubai's Shuaa Asset Management, said the stock market would continue upwards if fourth-quarter corporate earnings, to be announced in coming weeks, met analysts' expectations.
"If Q4 numbers are solid, expect the market to continue doing well compared to the rest of the region - we saw retail investors trigger the rally and institutional buying followed, which is healthy," Khan said.
Many fair-value estimates for UAE stocks that analysts released in mid-2012 have now been met or exceeded, so there is a risk that the rally will falter if fourth-quarter earnings do not provide enough reasons for analysts to lift their estimates.
"Value is something people haven't touched on and following the recent rally, it needs to be looked at," said an Abu Dhabi-based analyst, who declined to be named under briefing rules.
But he added, "If you ask if people are looking at price-to-earnings ratios, they're not doing that right now."
Dubai's index is trading at about 9.2 times analysts' estimates for corporate earnings in 2013, compared to 22.5 times in 2008.