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Dubai stocks plunge as Arabtec sparks margin call frenzy

  • File - Investors watch a monitor at Dubai Financial Market April 27, 2014. REUTERS/Mounir Saidi

DUBAI: Bourses in the United Arab Emirates suffered their biggest losses in months Tuesday as a slide in construction firm Arabtec, Dubai’s most heavily traded stock, triggered a chain of margin calls that forced a broad sell-off.

Dubai’s benchmark closed down 6.7 percent, its biggest daily loss since last August, after tumbling as much as 8.7 percent at one stage. At least 10 stocks fell by their 10 percent daily limits.

Abu Dhabi’s bourse sank 3.4 percent, its biggest drop since January 2011, with eight stocks limit-down.

Traders said the plunge was not due to fundamental economic concerns or tensions related to Iraq. Instead, the market was vulnerable to heavy selling after retail buyers sent it soaring earlier this year, they claimed.

Arabtec was a catalyst for Tuesday’s sell-off as the stock was the first to go limit-down after the company said it had laid off some staff. The announcement followed a move by major shareholder Aabar Investments to reduce its stake in Arabtec earlier this month, and the resignation of the company’s Chief Executive Hasan Ismaik last week.

Tuesday’s drop extended the stock’s loss this month to 53 percent, triggering margin calls for leveraged retail investors. Since there were no buy orders for Arabtec even at limit-down levels, investors were forced to meet the calls by selling other shares.

“The brokers ... had to go to other shares and sell,” said Fouad Darwish, head of brokerage services at Global Investment House in Kuwait. That in turn triggered more margin calls and further selling, which also affected Abu Dhabi as some UAE investors trade on both exchanges.

“This is reactive selling and in our business reactive selling is disastrous, because stocks move at prices which may have nothing to do with their fundamentals.”

Dubai’s index has now tumbled 26 percent from a multi-year peak hit in mid-May, erasing roughly $30 billion of its value.

The index is still up 19 percent year-to-date, and Arabtec shares are still up 52 percent. But the Arabtec saga has exposed major risks in the Dubai market, which along with Abu Dhabi and Qatar was upgraded to emerging market status by index compiler MSCI last month.

The bourse remains dominated by volatile retail investors, while many fund managers feel a lack of prompt corporate information disclosure contributed to the turmoil.

Aabar has not clarified its intentions towards Arabtec since Ismaik’s resignation, and the fate of his 28.85 percent stake in the company is unclear, though Ismaik told Reuters Tuesday that he had received three offers for the stake. He did not name the parties that made the offers.

Other markets in the region saw little effect from Dubai, but it did affect general sentiment, in addition to concerns over the heavy fighting in Iraq and a seasonal exodus of retail investors ahead of Ramadan.

Egypt was the worst performer in the region after the UAE bourses, sliding 1.7 percent. Unlike the oil-rich Gulf nations, its trade balance and state budget could suffer from any sustained increase in oil prices due to the Iraqi conflict.

“I believe that the current weakness is attributed to multiple factors including the beginning of Ramadan and the spillover of the sell-off seen in Dubai,” said Harshjit Oza, assistant director of research at Naeem Brokerage in Cairo.

“But I believe that the downside has been limited by factors such as MSCI keeping Egypt’s emerging market status alive.”

One-year dollar-Saudi riyal forwards, used as a proxy by hedge funds to trade in the region, fell back to normal levels Tuesday after jumping to their highest point since the Arab Spring uprisings in 2011.

 
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Summary

Bourses in the United Arab Emirates suffered their biggest losses in months Tuesday as a slide in construction firm Arabtec, Dubai's most heavily traded stock, triggered a chain of margin calls that forced a broad sell-off.

Dubai's benchmark closed down 6.7 percent, its biggest daily loss since last August, after tumbling as much as 8.7 percent at one stage. At least 10 stocks fell by their 10 percent daily limits.

Abu Dhabi's bourse sank 3.4 percent, its biggest drop since January 2011, with eight stocks limit-down.

Tuesday's drop extended the stock's loss this month to 53 percent, triggering margin calls for leveraged retail investors.


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