MIDEAST STOCKS-Dubai plunges 6.7 pct as Arabtec sparks margin call frenzy

Tue Jun 24, 2014 9:03am EDT

* No fundamental economic factor behind sell-off

* Arabtec margin calls trigger selling across UAE markets

* Exposes weaknesses in corporate disclosure

* Dubai posts biggest drop in 10 months, Abu Dhabi in over 3 years

* Other Gulf markets also decline

By Olzhas Auyezov

DUBAI, June 24 (Reuters) - Bourses in the United Arab Emirates suffered their biggest losses in many months on 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 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 any fundamental economic concerns, or to geopolitical tensions related to Iraq. Instead, the market was vulnerable to heavy selling after retail buyers sent it soaring earlier this year.

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. This triggered margin calls for leveraged retail investors and 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, I believe, 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 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 on Tuesday that he had received three offers for the stake. He did not name the parties which made the offers.

EGYPT

Other markets in the region saw little if any direct impact 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."

Iraq has not emerged as a major worry for the Gulf markets. One-year dollar/Saudi riyal forwards, used as a proxy by hedge funds to trade the region, jumped on Monday to their highest level since the Arab Spring uprisings in March 2011. But they fell back to more normal levels on Tuesday.

TUESDAY'S HIGHLIGHTS

DUBAI

* The index tumbled 6.7 percent to 4,009 points.

ABU DHABI

* The index slid 3.4 percent to 4,548 points.

QATAR

* The index slipped 0.9 percent to 12,323 points.

SAUDI ARABIA

* The index pulled back 0.3 percent to 9,522 points.

KUWAIT

* The index fell 0.5 percent to 6,936 points.

EGYPT

* The index slid 1.7 percent to 8,167 points.

BAHRAIN

* The index edged down 0.03 percent to 1,427 points.

OMAN

* The index slipped 0.2 percent to 6,921 points. (Editing by Andrew Torchia)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.