* Arabtec shares soar, then crash in a few months
* Debacle unsettles entire region
* Upgrade of UAE, Qatar by MSCI lured billions
* But markets still dominated by local speculators
* Secretive companies, laissez-faire regulators
By Olzhas Auyezov
DUBAI, June 25 (Reuters) - The spectacular rise and fall of
Arabtec, Dubai's most heavily traded stock, teaches hard lessons
about how risky the region remains for investors even as its
rapid economic growth lures billions of dollars in fresh funds
Wild trading by local retail investors who dominate
activity, plus weak corporate disclosure and a hands-off
approach by regulators, can make a toxic mix, and on occasion
destabilize entire markets.
Last month, the United Arab Emirates and Qatar were upgraded
to emerging market status by index compiler MSCI, a big step in
the Gulf's effort to become a mainstream destination for
international portfolio investors.
But within weeks, a collapse in the share price of Arabtec
, a major regional construction firm and one of Dubai's
most prominent companies, has shown the limits of that progress.
Earlier this year, frenzied buying by local individual
investors, much of it leveraged, drove the stock far above
prices which analysts considered justified.
Then the sudden resignation of Arabtec's chief executive,
who had unexpectedly amassed a huge stake in the firm, fueled
rumors of management turmoil. The share price halved in less
than a month, erasing some $3.9 billion of market value.
All the while, Arabtec has declined to answer important
questions about its business strategy and its relationship to
major shareholders. Angry fund managers say the resulting
uncertainty has hurt the whole market, including shares of
"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.
"Since the UAE markets are now part of MSCI's emerging
markets index, I hope that things will improve on the regulatory
front going forward."
The UAE's Securities and Commodities Authority (SCA), which
has "providing sufficient information and data to all parties
involved in the capital market at the same time" as one of its
missions, did not reply to emailed requests for comment. Dubai's
bourse declined to comment.
Arabtec says on its website that it has been described as
the "Darling of the Dubai Financial Market", and until recently
that label appeared justified.
The company's share price more than tripled between the end
of last year and mid-May, buoyed by its announcement of huge new
projects at home and abroad. In Egypt, it said it had won a $40
billion deal to build one million homes in coming years.
By May, most analysts surveyed by Reuters had a sell on the
stock - but still it kept rising. Much of the buying was with
borrowed money; this year Dubai's bourse accredited eight new
margin trading providers - brokers who offer leverage to
customers - bringing their total number to 19.
The bubble appears to have been inflated by two factors. One
was the MSCI upgrade. Though the amount of foreign institutional
money which entered Dubai in response to MSCI's decision was
relatively modest, estimated at around $1 billion, individual
investors in the UAE and around the Gulf took it as a cue to
"The MSCI upgrade story sucked a lot of unsophisticated
money into Dubai and Arabtec in particular," said Daniel Broby,
chief executive at British-based investment management firm
Gemfonds, which focuses on emerging markets.
A second factor was buying of Arabtec shares by its chief
executive Hasan Ismaik. In late May, Arabtec said Ismaik had
raised his stake to 21.46 percent from 8.03 percent; there was
no explanation of why, or where he obtained the money. In
mid-June, when Ismaik resigned, bourse data showed his stake had
risen further to 28.85 percent.
By then, the bubble had begun to burst and Arabtec shares
were in freefall. News that Abu Dhabi state fund Aabar
Investments, a major shareholder, had suddenly cut its stake in
the company to 18.85 percent from 21.57 percent cast doubt over
whether Arabtec still had Aabar's deep-pocketed backing.
Arabtec shares plunged as much as 60 percent between mid-May
and Tuesday this week, though they rose 5.1 percent on
Throughout the debacle, Arabtec has issued a string of
statements saying its business remains strong and that it will
protect shareholders' rights.
But it has not clarified key issues such as the make-up of
its future management team, its relationship with Aabar, what
might happen to Ismaik's stake, and whether all of the projects
initiated by Ismaik will continue.
The company has not held a news conference, and the bourse
has not suspended its shares pending clarification. Adding to
the mystery, Aabar has declined to make any public comment on
its intentions toward Arabtec.
The sight of one of Dubai's high-flying stocks falling to
earth unnerved the entire Gulf on Tuesday. Markets around the
region dropped, with the main Dubai index plunging 6.7 percent.
In the long run, the Arabtec debacle looks unlikely to
derail Dubai's stock market. Economic growth and the real estate
market are strong, so equity market losses are likely to be
absorbed without significant damage to the financial system; the
Dubai stock index is still up 26 percent year-to-date, though
down 21 percent from its mid-May peak.
Hard-bitten foreign fund managers who came to Dubai because
of the MSCI upgrade were ready for such volatility, and many of
them are believed to have got out of Arabtec before it crashed.
As of May 31, the top foreign shareholder in Arabtec was
Vanguard Group with 1.22 percent, Thomson Reuters data showed.
"The reality is that institutions do not gain index exposure
with their eyes closed," said Broby.
A monthly Reuters survey of 15 leading investment managers
in the Middle East indicated that after buying in early 2014,
many funds started to cut their Dubai holdings one or two months
before the MSCI upgrade occurred at end-May.
Dubai's army of individual investors bore the brunt of the
Arabtec losses; some of them may feel they learned a lesson from
the crash and trade more cautiously in future.
At the very least, trading turnover may be lower and price
swings less dramatic in some of Dubai's most speculative stocks
in coming months.
It is not clear whether the Arabtec debacle will cause UAE
regulators to review the way they handle corporate disclosure.
They have given no sign of doing so, but the UAE aims eventually
to be upgraded to developed market status by index providers.
More transparency could help; MSCI's criteria for developed
markets includes "timely disclosure of complete stock market
A local fund manager, speaking on the condition of anonymity
because of the sensitivity of the issue, said the SCA needed to
investigate the matter to restore investors' confidence.
"It has a duty towards companies, towards investors, towards
society at large," he said. "Capital markets are a reflection of
the economy and now credibility is hit."
(Additional reporting by Stanley Carvalho in Abu Dhabi and
Carolyn Cohn in London; Editing by Andrew Torchia)