Dubai market has investors nervous

The roller coaster that is Dubai’s stock market index continues to confound investors who have bought companies on the volatile exchange.

The Dubai Financial Market Index, which has been both one of the best-performing indexes in the world this year, but one of the worst performers in the past six weeks, rebounded 6% Wednesday after plummeting by a similar amount the previous day.

At the heart of the volatility in recent weeks has been the country’s property companies, especially Arabtec Holding Co., the United Arab Emirates’ largest listed builder.

Arabtec had a spate of executive exits and layoffs this week and has frustrated investors by refusing to answer important questions about the shuffle in senior management and its business strategy. The company’s stock fell by almost 10% on Tuesday, before recovering 5.1% on Wednesday.

“These types of things do not happen in developed markets, where regulators play an active role in ensuring transparency,” said Shakeel Sarwar, head of asset management at Securities & Investment Co. in Bahrain, a major fund manager.

The steep tumble in Dubai’s stock market has shades of the emirate’s 2009 financial crisis, when property prices crashed and the stock market subsequently tumbled. Dubai managed to narrowly avoid default when it was bailed out by fellow emirate Abu Dhabi.

What is different now is just how lofty Dubai’s stock market has become. The DFM index has soared 250% in the past two years, led by a surge in property companies, which dominate the index and account for an outsized share of Dubai’s economy.

The Central Bank of the United Arab Emirates on June 8 warned that property prices in Dubai and Abu Dhabi showed signs of overheating, with prices having grown nearly 28% in the first quarter compared with a year ago.

That marked the biggest jump in property prices in the world, based on data from property consultancy Knight Frank.

But property prices are not the only reason Dubai has lured so many stock investors over the past two years. Last year, index compiler MSCI announced it would upgrade the U.A.E. to emerging status, something it finally did last month. That fuelled a wave of stock buying among international investors, as well as retail investors in the Persian Gulf states.