Buy the rumor, sell the news - MSCI Upgrades UAE and Prices dip as investors take gains

Written by Zachary Cefaratti, Risk Officer at Dalma Capital Management Limited
Analysis by Elliot Carol, Portfolio Manager at Dalma Capital Management Limited
Dalma Capital Management Limited is a DFSA regulated asset manager operating in the DIFC; the company’s core business is hedge fund management.

www.dalmacapital.com

On 11 June 2013, MSCI announced its plan for a possible upgrade of its UAE Index to Emerging Markets status from Frontier Markets. On 14 May 2014 MSCI confirmed this reclassification during its semi-annual review meeting held in Geneva. As part of this change, the following nine UAE companies will be included in the MSCI Emerging Markets Index: Abu Dhabi Commercial Bank (ADCB), Aldar Properties (ALDAR), Arabtec (ARTC), DP World (DPW), Dubai Financial Market (DFM), Dubai Islamic Bank (DIB), Emaar Properties (EMAAR), First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD). The change in index constituents will take effect on Jun 01, 2014.

Despite the positive impact inclusion in the index is likely to have, the four trading days following this announcement both the DFM General Index (DFMGI) and ADS Market Index (ADSMI) have witnessed a sharp decline in price levels of 12.5% and 5.3%, respectively. This is in contrast to an increase in index levels of a staggering 125.5% and 40.6% for DFM and ADS between the original MSCI announcement on 12th June 2013 and the recent announcement on 14th May 2014. The recent price action indicates selling pressure, post confirmation of upgrade, by investors seeking to realise capital gains.

“In the very short term, the technical (chartist) outlook is quite bearish. May 19th saw the breakdown of a double top-reversal pattern,” commented Ryan Mahoney, a Portfolio Manager at Dalma Capital Management Limited, adding “The close of DFMGI below 5000 is a possible indication that the 10-week uptrend is losing momentum. The next key support zone is between 4720 and 4760 – in the near term, we believe we are likely to see a drop to this level. If support consolidates in the bottom of this range – there is room for a continuation of the larger bull trend. Should the index break below 4665, this would indicate a broader correction which could continue to 4212 finding major support at 4000.”

Data Source: Bloomberg Professional
 “Analysing the data from a bottom up perspective, a price trend similar to that observed in the broader DFM and ADS indices can be seen in the stock prices of the nine companies that are now constituents in the MSCI Emerging Markets Index” observes Elliot Carol, Portfolio Strategist at Dalma Capital Management Limited. “This indicates that impact of the MSCI UAE upgrade was already priced in by investors, who took the opportunity to realise capital gains when the news was confirmed, a classic example of ‘buy the rumor, sell the news.’”
Average daily volumes pertaining to the DFM, ADS as well as the nine stocks mentioned above have significantly increased after MSCI’s announcement on 14th reconfirms selling pressure by investors seeking to realise gains.