This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ABU DHABI 001927 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON AE EINF
SUBJECT: UAE STOCK MARKET DOWN 
 
REF: ABU DHABI 975 
 
¶1. (U) Summary:  The UAE's two stock markets, like others in 
the region, are experiencing a sharp drop from the high 
prices of 2005.  GCC investors, especially Saudis, are 
reportedly withdrawing from the UAE market and investors are 
nervous about increasing Iranian-U.S. tensions.  The U.S. 
stock market may be the beneficiary of the drop in GCC stock 
markets as investors again look to move their financial 
assets outside the region.  UAE investors are highly 
leveraged.  Falling stock markets are forcing them to sell 
their shares in order to meet their loan payments, further 
driving down prices.  So far, the UAE federal and emirate- 
level governments are not intervening aggressively to prop 
up the market, although they are looking at some steps to 
improve investor confidence.  Fundamentally, however, it 
does not appear that the current bear market will have a 
systemic effect on the UAE economy, although it may hurt 
individual companies and investors.  Other economic 
indicators remain strong, oil prices are high, and the 
Emirate of Abu Dhabi has sufficient reserves available to 
cushion any major economic impact on UAE nationals.  End 
Summary. 
 
The Bubble Has Burst 
-------------------- 
 
¶2. (U) In 2005, the UAE's two local stock markets grew 
explosively, when they led the region in terms of market 
capitalization, turnover, and number of IPOs.  By the end of 
2005, both the Dubai Financial Market and the Abu Dhabi 
stock market were overvalued.  In early 2006, two large 
simultaneous IPOs pulled liquidity out of the market and 
helped trigger a significant, ongoing correction (reftel). 
As of May 7, both the Dubai Financial Market index and the 
Abu Dhabi Stock Market index reached their lowest levels in 
14 months.  According to newspaper reports, total market 
capitalization dropped about 20% from October 2005 (around 
$221 billion) to $175 billion on May 7, 2006.  Most 
financial advisors and investors argue that the UAE stock 
markets are either becoming reasonable again or are 
undervalued.  Several noted that blue chip stocks like 
property developer Emaar and telecommunications company 
Etisalat were extremely cheap, as were several financial 
institutions. 
 
¶3. (U) Although the market bubble was bound to pop, there 
are concerns that it is overshooting on the way down.  There 
are several reasons for the continued drop.  Very few 
companies on either stock market are actively traded, a 
factor which increases volatility.  Regional investors, who 
invested heavily in the UAE's market in 2005, have been 
reducing their exposure.  One institutional investor noted 
that the Saudis triggered much of the latest stock market 
drop when they sold their UAE securities to cover losses in 
the Riyadh stock market. 
 
¶4. (U) Market psychology certainly is playing a role, as 
investors express concerns about Iranian-Western tensions, a 
lack of transparency in the market, and general fears that 
the markets will keep going down.  One financial advisor 
told econchief that although he thought the market was 
fundamentally undervalued, he wouldn't recommend investing 
in it until it stabilized. 
 
¶5. (U) Leverage (i.e, borrowing) and "stop loss" orders for 
sales are the major driving force behind the current drop. 
There are five large mutual funds in the UAE offering both 
UAE nationals and expatriates an easy way to invest in UAE 
stock markets.  All of these funds encouraged investors to 
leverage their positions, and UAE banks have also increased 
their loans to stock market participants.  During the boom 
market, investors were able to repay their short-term loans. 
Now that the market is dropping, however, investors are 
forced to sell their shares in order to repay these loans. 
In addition, many investors - including the institutional 
investors have "stop loss" orders instructing their brokers 
to sell shares when they drop below a certain price.  The 
current drop in price has triggered these orders, further 
pushing prices downward. 
 
What is the Government doing? 
----------------------------- 
 
¶6. (U) There are increasing public calls for the government 
to act to help stabilize the market, and some limited 
government action is already occurring.  The Emirate of Abu 
Dhabi has reportedly authorized its pension fund to invest 
two billion dirhams in the Abu Dhabi stock market over the 
next two to three months.  One analyst argued that the UAEG 
would not intervene in the market sufficiently.  He noted 
that the federal government didn't have the financial 
resources to intervene aggressively in either market, and 
that the Emirate of Abu Dhabi is unlikely to intervene to 
prop up Dubai's market.  For its part, the Dubai government 
is heavily invested in real estate projects and may not have 
the funds readily available to intervene in the stock 
market. 
 
¶7. (U) The UAEG is looking at other steps to improve 
regulations and investor confidence.  The cabinet is 
considering a Ministry of Economy proposal that would 
facilitate company buy-backs of outstanding shares.  The 
Ministry of Economy has also taken steps to better regulate 
the schedule of IPOs or new capital increases in order to 
ensure that they do not draw liquidity from the market. 
Some investors, however, are arguing that the intervention 
is "too little, too late" and are clamoring for more 
aggressive moves, including having the banks reschedule 
loans so that investors do not need to liquidate their 
holdings to meet repayment deadlines. 
 
¶8. (U) There has also been a call for improving transparency 
and regulations in the markets.  The semi-official Arabic 
daily Al-Ittihad published an editorial by the Emirates 
Center for Strategic Studies and Research calling for 
increased authority for regulators to deal with problems of 
transparency and situations where some investors have access 
to information in advance of others (i.e., insider trading). 
 
¶9. (U) UAE stock markets are still relatively immature and 
have been developing much faster than regulatory capability. 
Hence, there are problems with transparency and governance. 
Several financial analysts have privately noted, however, 
that "no one complained when the market was going up," and 
that regulations tend to tighten in market downturns.  They 
add that generally enough information is available on the 
major companies for investors to be able to make investment 
decisions.  One Abu Dhabi investor admitted that it was 
harder for him to assess the Dubai market, with its 
extensive government ownership and cross holding of shares. 
Even there, he argued, information on companies such as 
National Bank of Dubai was adequate for analysis.  The UAEG 
has taken some steps to deal with the perception of 
transparency, with the Securities and Commodities Authority 
announcing that it would fine listed companies that failed 
to disclose their first quarter results on time. 
 
Where is the Money Going? 
------------------------- 
 
¶10. (U) High oil prices ensure that the UAE remains flush 
with cash, although it is not going into the stock market. 
One financial analyst noted that individuals are keeping 
their funds in deposit accounts for the time being.  Several 
analysts stated that the U.S. stock market was the major 
beneficiary of the fall in GCC stock markets.  They argued 
that post 9/11, many Gulf Arabs increased their regional 
investments and reduced their U.S. exposure.  With regional 
tensions and falling regional equity markets, they are again 
looking overseas.  This means, they note, that the U.S., 
with the world's largest and most transparent capital 
markets, is benefiting.  They cite recent increases in the 
U.S. markets to prove their contention. 
 
What does the Market's Fall Mean to the Economy? 
--------------------------------------------- --- 
 
¶11. (U) The local papers are full of articles discussing the 
importance of a stock market to a country's economy, and 
some are justifying government intervention on economic 
grounds.  It doesn't yet appear, however, that the markets' 
fall will have a systemic impact on the UAE's economy.  Oil 
prices are projected to remain high and massive investment 
projects, especially in Abu Dhabi and Dubai, will continue 
to support economic growth.  This doesn't mean, however, 
that some companies and investors won't be affected. 
 
¶12. (U) The banking sector's profitability has been largely 
due to its involvement in IPOs and equity markets, through 
fees and margin lending.  The insurance sector has invested 
heavily in the UAE stock markets on its own account. 
Individual investors are facing dropping stock market prices 
and loan repayments.  In addition, some analysts have warned 
that the drop in the stock market could have an impact on 
the overheated Dubai property market as investors either 
sell off their property or (more likely?) don't invest as 
heavily in new developments.  In any case, the Government of 
Abu Dhabi is likely to have sufficient financial resources 
to cushion any major UAE-wide or Abu Dhabi specific economic 
impact on UAE nationals. 
 
Whither the Market? 
---------------------------- 
 
¶13. (U) There is much speculation regarding where the UAE 
market is going over the next few months.  It is now getting 
cheap enough to attract investors put off by the high prices 
of 2005.  Some analysts suggest that quasi-institutional 
investors will eventually step in or companies will buy 
their shares back.  Others, especially those calling for 
government intervention argue that UAE investors may be 
losing trust in the market and are not likely to jump back 
in quickly.  They note that UAE stocks took years to recover 
from the last collapse in the "over the counter" market in 
the late '90s and suggest that recovery could be prolonged 
in this case as well.  No one is expecting a rapid growth in 
the market like that seen in 2005. 
 
SISON