When Dubai shocked the world in November 2009 with a statement that it would not be able to repay its debts, the emirate’s stock market tumbled by a quarter over three tumultuous weeks.
Over the past six weeks, and for the most part little noticed, the Dubai Financial Market has suffered a similar fall as investors have headed for the exit after a dizzying rally.
Underlining the volatility that dogs this retail-dominated, rumour-driven market, the last two sessions have witnessed an impressive rebound as investors sense a floor. It ended up 7.9 per cent on Wednesday.
“This boom had everything to do with a prolonged period of low interest rates globally – and Dubai is a small market so it’s easy to inflate,” says Maria Gordon, head of emerging market equities at Pimco. “The market may be in bear territory simply because of such a spectacular rise, even while the economy is doing well.”
Despite the slide, DFM’s index - one of the world’s best performing over the past 18 months - remains more than 20 per cent up on this year.
Underpinned by strong tourism, trade and transport sectors, the political unrest of the Arab spring has boosted Dubai’s importance as a business haven in a divided, violent region.
The city’s real estate recovery through 2012 was followed by an equities bull run: the index rose 122 per cent from last September through to May’s peak. “The market was just itching for an excuse to sell off,” says one banker.
Bankers say companies planning initial public offerings on the Dubai bourse, such as Emaar’s retail arm, are reconsidering launch dates. Real estate agents, moreover, are worried that a steep decline in property transactions could be tipped over into a real estate correction.
The volatility on DFM is being attributed in part to concerns over governance at one company, construction firm Arabtec, the builder of Dubai’s landmark Burj Khalifa.
Two years ago, Aabar, a unit of a major Abu Dhabi state investment company controlled by Manchester City owner Sheikh Mansour bin Zayed Al Nahyan, took control of the builder, disclosing a 20.67 per cent stake.
Jordanian national Hasan Ismaik joined the board as an Aabar representative in 2012 and in February 2013 took over as chief executive with the departure of experienced founder and chief executive Riad Kamal.
Mr Ismaik was an aggressive cheerleader for the company as Arabtec won large Abu Dhabi contracts and expanded overseas, a move that included a $40bn affordable housing project with Egypt’s military rulers.
After announcing a 121 per cent jump in first quarter profits in early May, the company revealed that the chief executive had built his personal holding to 28 per cent, while Aabar trimmed its stake from 21.6 per cent to 18.9 per cent.
Three weeks later, in mid-June, Mr Ismaik resigned as his senior staff were removed. The company’s stock price declined by a third.
Construction executives had long feared that new management would not be able to match the ambition and prove to be Arabtec’s undoing.
HSBC has said the company needs to hire 17,500 white-collar staff to execute its project backlog through 2017.
On Thursday, Dubai-based Arabtec held a press conference in Abu Dhabi, finally addressing weeks of turmoil that have punctured market confidence.
Khadem al-Qubaisi, Arabtec chairman and senior Abu Dhabi official, said the emirate remained committed to the company, which he said was restructuring and cutting costs.
But market observers say the damage has already been done. The UAE this month was upgraded from frontier to emerging market by the MSCI index.
“What does this mean for the reputation of Dubai,” says one financier. “This period should be one of great promise, but now we have to deal with this.”
Traders say the UAE regulator, the Emirates Securities and Commodities Authority, as well as the DFM, should have forced more disclosure from Arabtec over the past few weeks, especially regarding Mr Ismaik’s personal shareholding.
Esca said in a statement it had taken necessary steps to ensure good corporate governance, saying it had pressed Arabtec to react to rumours and that the company had obeyed disclosure rules.