Dubai stocks reach 5-year highs

Stocks on Dubai's benchmark DFM rose by another 1.11 percent to 3243 points Thursday, the last trading day of the week, doubling its gains so far this year.

The move makes it one of the world's best performing indexes, second only to Venezuela, with just over a week to go until 2013 comes to an end. The DFM's current level has not been seen since October 2008, before the market tumbled in the wake of a global financial crisis which pushed Dubai to the brink of default.

Karim Sahib | AFP/Getty Images

The Emirate has benefited from burgeoning capital inflows as a result of being perceived as safe haven,in a region where political upheaval has dramatically altered the risk-reward equation.

A string of activity-boosting accolades in recent months, including an upgrade to Emerging Market status by index compiler MSCI and the right to host the world's fair, the Expo 2020 have only served to fuel the euphoria.

(Read more: Dubai listsfirst new stock in four years, but no trading)

"When you add attractive valuations and foreign liquidity chasing UAE the formula for a strong rally is there," Fadi Al-Said, Head of Investments at ING Investment Management in Dubai, explained to CNBC.

Dubai does not enjoy the oil wealth of neighboring Abu Dhabi, and has focused on positioning itself as a center for tourism, logistics and services. Year-on-year economic growth in the first half of 2013 amounted to 4.9 percent, largely outpacing its regional rivals in the Gulf.

Meanwhile, the UAE's HSBC Purchasing Managers Index (PMI) reading came in at 58.1 in November, indicating the challenge ahead was one more of managing -- rather than stimulating -- growth.

"I would be concerned about a heating up in the market,and excessive speculation that is not based on fundamentals. So I would be very selective in this rally," Al-Said cautioned.

Property boom

It's not just equities that have surged in Dubai.

The Emirate's infamous property market, subject to dampening regulatory measures in recent months, has experienced some of the highest price increases of any city in the world.

According to the third-quarter Prime Global Cities Index by Knight Frank, prices rose 21.8 percent in annual terms. Much of the sentiment is being driven by the anticipation of further capital intensive work in preparation for the Expo 2020.

"In reality, many of these associated investments will take years before they reach fruition," David Staples, managing director for corporates at Moody's Investors Service, told CNBC.

(Read more: Dubai stocks in steep decline but volatility seen short-lived)

Shares in bellweather real estate developer Emaar Properties have rallied 29 percent over the last three months. Last week, the company announced a memorandum of understanding with government initiative Dubai World Central to for a major Expo 2020 development, but did not disclose its value.

"The question is whether the anticipated growth will flow through earnings in the coming year to the extent that is currently expected by the market, and whether corporates in this sector can avoid over-leveraging their balance sheets in seeking to deliver results".

Investors are also watching how Dubai will repay some $48 billion in debt maturities between 2014 and 2016.