The UAE equity market has been in the doldrums for the last few years but may see better days ahead. The DFM (Dubai Financial Market) index is up only marginally for the year but is up over 10 percent from its May lows.
Since 2015, the index has tracked the oil price closely. The price of Brent Crude reached a low of $27.43 in January 2016, which coincided with the Dubai index’s 2-year low. The initial recovery for both Crude and UAE stocks was rapid but has since slowed. For the past 12 months, the oil price has been stuck in a trading range between $44 and $58. The Dubai market has traded in a 12% range over that period.
Looking forward there are two factors that will impact the index in both the long and the short term, namely the oil price and how dependent the UAE economy is on oil. Over the past three years, the knee jerk reaction has been for the equity market to track the oil price. But the weak oil price will eventually force investors and businesses to look beyond oil rather than just accept their fate.
This goes for foreign investors as well as UAE investors, who have plenty of other options, including foreign equity and property markets. Local speculators meanwhile tend to lose interest when volumes dry up. There has been far more volatility in other markets, and with trading platforms like IG Index, residents aren’t limited to the Dubai market or the Abu Dhabi market.
Traditionally the UAE economy has relied heavily on oil exports. But the country has been making a concerted effort to diversify away from oil. By 2016 the country had reduced its dependence on oil to just 30% of GDP, with a target of 20% by 2021.That doesn’t mean the stock market is disconnected from the oil market but over time the oil price will become less important.
Efforts to increase investment in the financial services and real estate sectors in the country should begin to de-couple the index from the oil price over the course of the next decade.
So, what about the oil price itself? The price has been under pressure since early 2015 as demand has remained relatively stable while supply has surged. On top of that, a steady stream of news about electric cars has also weighed on the long term outlook for oil. However, it’s important to remember that even if the world does begin to turn its back on oil, that will be a long and slow process. In the meantime, demand for oil is still rising, and will once again outpace supply at some point in the next few years.
The Dubai index needs to convincingly break above 3720 before a sustained rally can begin. To do this we will also need to see the oil price break resistance, which for Brent Crude is at $55 and $58. The price attempted to break above the $55 level in August but failed, and now the level is being tested again.
There’s a fairly good chance these resistance levels will be breached in the next few months, and that will set up a strong rally for the equity market. And if that happens it may well give the real estate and financial sectors enough momentum to de-couple the index from the oil price too.