The run-up to an event is often more exciting than the event itself. This is as much true in one’s personal life as in the case of milestones in a country’s economic progress.

The inspirational part of the anticipated entry of the UAE into the MSCI Emerging Markets fold had its run for over a year before it actually took place last month, putting a market like Dubai in the company of the world’s best performers. In fact, since the beginning of last year, the Dubai stock exchange recorded gains of almost 200 per cent.

The trouble with such over-excitement is that by the time the actual event takes place, the drama would already have played out, leaving no scope for further performance. To Dubai’s credit, it must be said that this has not happened as stocks continue to head north. Furthermore, market sentiment favours a further upside, although the optimism seems tempered.

Less pricey markets

Sensing that values are hitting the roof, at least some fund managers are known to have decided to cut their exposure to Dubai and UAE stocks and divert the money to less pricey markets such as Saudi Arabia. Obviously, these funds believe that the risk-reward proposition for the UAE market has deteriorated, as is probably the case with Qatar, the other claimant of the Emerging Market status.

They look at the Saudi market as particularly attractive for its realistic levels, while Egypt under the new dispensation, is also considered a potential destination for new fund flows.

Of course, another section of fund managers continue to be bullish and apparently planning to deploy more funds in the local markets as they feel there is still some way to go. They base their optimism on the fact that some of the post-Emerging Markets trading sessions have seen price increases being extended to stocks that are not part of the MSCI index. One can only hope that when the squaring up time comes, the reward is commensurate with the risk.

But for the less spirited, there are clearly reasons for worry. The UAE markets already underwent a correction just before the MSCI inclusion took effect, falling over 5 per cent in one day and registering the biggest drop in the index in almost one year. This should have brought the market to a more realistic level, but subsequent sessions have seen prices recover to some extent.

A major cause for worry is that the property sector stocks have registered price increases of 400 per cent over the past one year and this has been a major driver of the overall index.

Although the exposure of banks to the property sector is not anywhere near the 2008 levels on way to Dubai’s full-blown financial crisis, it is still quite high and a problem in the property market can have its ripple effect. Overall, the banking sector is estimated to have exposure levels of more than 25 per cent to the property sector, with loans to the sector exceeding 100 per cent of the total equity of the banks. There is already talk of unsustainable increases in property prices and this cannot but have implications for banks and in turn for the stock market.

From another angle, the ideal setting for a fully-fledged correction is around the corner, with the peak summer combining with the advent of Ramadan, both of which are known to be lean periods for stocks trading in regional markets. We have had many a summer of discontent in the past, which saw investors, particularly at the retail level, burn their fingers while their more privileged counterparts took positions of safety.

When it comes to the crunch, it is the rest of the market that always bears the brunt. For those who do not want to see themselves holding the bag for others, it is perhaps the best time to take cover.

— The writer is a senior journalist based in Dubai