Institutional investors are sitting out the recovery on UAE stock markets, wary about Dubai's debt rescue proposal and hesitant about prospects longer term, analysts say. Broader issues like liquidity and market breadth may prevent foreign institutions from coming back to UAE exchanges, which are dominated by property and banking stocks that are closely linked and which lack defensive counters. In addition, UAE is not included on the MSCI Emerging Markets Index against which large institutional funds benchmark their performance, meaning many fund managers cannot buy UAE stocks regardless of how attractive valuations are. The MSCI Emerging Markets Index gained more than 78 percent in 2009 while the Dubai and Abu Dhabi indexes rose 10.2 percent and 15 percent respectively during the same period. “There is a lot of institutional cash sitting on the sidelines, waiting for a pull-back. This hasn't happened yet, so we will have to see if they decide to chase the market,” said Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading. Stock markets in the UAE have rallied on retail interest since Dubai said it will spend up to $9.5 billion restructuring its debt-laden Dubai World conglomerate. The plan will give bank lenders their money back in five to eight years and repay two key bonds Investors cheered the move, with Dubai's index rising 6.3 percent to a 14-week high in the two trading days following last week's announcement, while Abu Dhabi's benchmark gained 2 percent over the same period. But analysts say more institutional involvement is needed for the rally to be sustainable, with current trading largely the preserve of short-term retail traders. Institutional buyers want more details on Dubai's debt plan such as how the cash-strapped emirate will raise the $3.8 billion. Also, the government said bank creditors would receive 100 percent principle repayment via a new debt with five and eight-year maturities. There was no detail on the interest rate. “The immediate problem is solved but the danger still looms. This has largely been a retail-driven rally,” said Vyas Jayabhanu, head of investment at Al Dhafra Financial Broker. “Whatever the volume, a magnitude of funds have been pulled out by institutions and still have not come back to the market,” he said. “It's very hard to build a regional portfolio here when trading is concentrated mainly in banking and real estate stocks,” said Robert McKinnon, ASAS Capital chief investment officer. “The other issue is liquidity, volumes are still very low to attract institutions. “Foreign institutions have been burnt in the past. The next time they come in, they are going to be a lot more cautious.” Dubai World shocked global markets in November when it announced a standstill for about $26 billion of debt related to its property units Nakheel and Limitless. A last minute lifeline from Abu Dhabi helped avert default on a $4.1 billion bond issued by Nakheel. Meanwhile, the outlook for the UAE economy is “promising” despite the impact of the Dubai World debt announcement, UBS chairman Kaspar Villiger said during a meeting with Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, deputy ruler of Dubai and president of the Dubai International Financial Centre (DIFC), news agency WAM reported. The Swiss bank's chief also said there were “fresh opportunities” for economic recovery in the UAE and in Gulf region.
