The Dubai Market Dropped 25 Percent. It’s Still Overvalued

Dubai’s stock market is in the midst of an epic crash. After falling 6.7 percent on Tuesday, the biggest drop since August, Dubai’s largest stock index, the DFM General Index, is down 25 percent from its peak in May.

A sell-off that steep usually presages a nice buying opportunity, but it looks as if Dubai stocks might have further to fall. Relative to other emerging market stock indices, Dubai’s remains overvalued.

Dubai stocks remain priceyBloombergDubai stocks remain pricey

As Bloomberg’s Chart of the Day shows, based on a ratio of price to current annual earnings, Dubai’s DFM General Index is 37 percent more expensive than the MSCI Emerging Market Index. Unless you think that Dubai’s fundamentals are stronger than they currently appear, any buying opportunity might be a few weeks away.

While it’s not clear when the free fall will terminate, it could mark the end of Dubai’s third boom-bust cycle in 11 years.

The third descentBloombergThe third descent

The DFM index shot up by 700 percent from 2004 to 2005—its inaugural year—and then lost half its value over the next 18 months. After another brief run-up in 2007, stocks crashed during the financial crisis. Dubai’s stock market was subsequently late to the current global bull market. Stocks there didn’t start to rally until the beginning of 2013.

With Dubai’s stocks appearing overvalued relative to those of other emerging markets, the latest sell-off could be muted by a strengthening economy. After shrinking 20 percent in 2012, Dubai’s economy grew 4.6 percent in 2013, the fastest pace since the go-go years of 2007.

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