World Markets

Dubai stocks in steep decline but volatility seen short-lived

Charles Crowell | Bloomberg | Getty Images

Dubai's stock exchange is still in sharp decline, and gave up another 2.5 percent during the last trading day of the week on Thursday. But much of the selling pressure appears to be part of a larger correction, rather than fundamental weaknesses or exposure to the turmoil in Syria.

"Valuations were beginning to look stretched and a correction was expected irrespective of events in Syria, and should be perceived as healthy," Ifran Ellam, head of MENA equity research at Emirates NBD, Dubai's largest lender, told CNBC.

At its peak on August 25, Dubai's benchmark index was up 69 percent year-to-date, making it one of the top performing markets in the world. However, when U.S. President Barack Obama began weighing a military response to the chemical attacks in Damascus, buyers' interest in Dubai stocks ebbed.

In the course of two weeks, Dubai's index has plunged over 13 percent, more than any other benchmark in the region.

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"The DFM (Dubai Financial Market) index is likely the most reflective barometer of the risk appetite of regional, retail, and international institutional investors, because of Dubai's regional hub status, the allocation of excess retail wealth and the recent surge of foreign inflows," said Hasnain Malik of research provider Frontier Alpha.

In June, index compiler MSCI upgrade Dubai (and the neighboring emirate of Abu Dhabi) from frontier market to emerging market status. But it is precisely this tighter integration with global capital flows that makes the DFM more vulnerable.

On the other hand, investors from within the Arab World consider Dubai a safe-haven. Plus, GDP growth in Dubai, driven by a recovery in sectors such as tourism, trade and real estate, is forecast to reach 3.1 in 2013, and 3.6 percent in 2014, according to the International Monetary Fund.

Giyas Gokkent, group chief economist at the National Bank of Abu Dhabi, was upbeat. "Medium-term prospects for local markets are still positive, as profitability of listed companies gradually improve".

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In the event of a U.S. strike on Dubai, the expected uptick in volatility may prove short-lived, creating attractive buying opportunities.

"At this stage this does not look like the sort of halting catalyst we saw in previous stock market rallies in the Middle East, such as the Dubai World announcement in 2009, or the Arab Spring in 2011," Malik said.

As the U.S. congress debates whether or not to give authorization for a military strike against Syria, a wider conflagration was still seen as highly unlikely.

"If the strike is limited and Iran, Russia are not involved in the conflict, then the effect on markets would also be limited," Gokkent said.