Global sell-off hits UAE stocks as US recession fears mount: Experts react

The Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) saw significant declines, reflecting growing investor concerns about a potential global recession and its impact on the region.

The DFM index fell 4.51 percent while the ADX dropped 3.41 percent, marking one of the worst trading days for UAE markets in recent memory. The steep declines came as investors reacted to weak US jobs data released last Friday and growing anxiety about the global economic outlook.

“The wave of panic selling has been global, across markets, and across assets. It looks like a significant liquidation event. The Middle East should not be spared, especially with added geopolitical tension as a backdrop,” Amer Halawi, Head of Research at Al Ramz PJSC, told Arabian Business.

Global factors driving selloff

The market turbulence was primarily sparked by disappointing US employment figures.

“In July, the pace of job creation in the US decelerated noticeably. Last Friday, the Nonfarm payrolls increased by 114,000, falling short of the anticipated 175,000. The unemployment rate rose to 4.3 percent from 4.1 percent, while wage growth moderated,” Vijay Valecha, Chief Investment Officer at Century Financial, explained.

This weak jobs report, combined with other economic indicators, has fueled fears of an impending recession in the world’s largest economy. Markets are now pricing in aggressive interest rate cuts by the US Federal Reserve, with expectations of a 50-basis-point cut at the September meeting.

Adding to the global economic concerns, China’s economy showed signs of slowing more than anticipated in the second quarter. This development has further dampened investor sentiment and contributed to the worldwide market selloff.

Geopolitical tensions amplify market volatility

Rising geopolitical tensions in the Middle East have exacerbated market volatility.

“Tensions between Israel and Iran have heightened significantly, bringing the Middle East closer to a possible conflict,” Valecha told Arabian Business.

“The recent killing of Hamas political leader Ismail Haniyeh has raised concerns about broader regional turmoil and a potential clash between Israel and Iran.”

These escalating tensions have not only affected regional markets but have also contributed to the global risk-off sentiment, pushing investors towards safe-haven assets.

Volatility expected to persist

Market experts anticipate continued volatility in the coming days and weeks.

“The volatility index of the S&P500 went through a meteoritic rise of more than three-fold – from 18.59 at the close of last Thursday to 65.73 at the high of today. While the VIX is significantly down from its intraday high, we believe that it should remain elevated until we see more clearly how the economic situation is unfolding,” Halawi said.

Valecha echoed this sentiment, pointing out that the VIX, often referred to as the “fear index,” was trading near 61.02, up from 23.05 on Friday. He added, “This confirms that the markets are highly volatile, and the trend could last for a few weeks if not months.”

Recession fears: reality or overreaction?

While market movements suggest growing recession fears, experts remain divided on whether a downturn is imminent.

“The market is currently pricing recession in two ways. Firstly, the expected Fed Fund rate path has instantly moved from one mild possible rate cut, to a near-certain, multiple rate pivot. Secondly, the panic liquidation selling we saw signalled a level of concern seen at critical junctures like the Great Financial Crisis, and ahead of major recessions,” said Halawi.

However, he also pointed out that current US economic data, particularly unemployment numbers, signals some slowing but is not yet in recession territory.

Valecha, on the other hand, suggested that according to the Sahm Rule, a reliable gauge of past economic downturns, “the recession has already begun.”

Mathieu Racheter, Head of Equity Strategy Research at Julius Baer, and David Kohl, Chief Economist at Julius Baer, offered a more optimistic perspective. In a joint statement, they said, “We view the current batch of soft data as a temporary pause in the ongoing economic recovery and continue to price in a low risk of recession (25 percent).”

Despite the current market turbulence, some experts see potential opportunities for investors.

“A market downturn often presents a unique opportunity for long-term investors to acquire high-growth stocks at discounted valuations. The 2020 market crash and subsequent S&P 500 surge of over 114 percent are prime examples of this phenomenon,” Valecha said.

He suggested that investors consider integrating gold and bonds into a diversified portfolio and explore strategies such as dollar-cost averaging to mitigate market risks during periods of volatility.

Reasons for optimism

While many experts express concern, Sam North, Market Analyst at eToro, offers a more optimistic perspective.

“Recent market moves seem overdone and not aligned with economic fundamentals or monetary policy. I believe stocks will continue to rise in the medium term, though the path might be bumpier,” he told Arabian Business,

North pointed to several factors supporting his positive outlook:

“Solid earnings growth is another reason to not panic. With most of the S&P 500 reporting, earnings are up 11.5 percent annually, the fastest since late 2021, and revenues have grown for 15 quarters straight,” he explained.

He also highlighted strong US economic growth. “US GDP grew by 2.8 percent in the second quarter, continuing a trend of over 2 percent growth in seven of the last eight quarters.”

Regarding the recent jobs report, North cautioned against overreaction. “The unemployment rise was mainly due to temporary layoffs from Hurricane Beryl, which should reverse next month. Even if the jobs report signals bigger issues, the Fed has tools to respond.”

Positive outlook for UAE markets

While the global economic outlook remains uncertain, experts believe that UAE fundamentals remain solid.

“Market valuations might seem compelling after such a selloff, especially in our part of the world. And the selloff might look overdone as it prices recession where there is none for now,” Halawi explained.

However, he cautioned against rushing into the market, advising investors to be selective and wait for more clarity about the global economy before making significant moves.

Sam North of eToro offered a balanced view on the regional outlook.

“For the Middle East, this situation might mean continued volatility in global markets, affecting oil prices and trade. However, the region’s ongoing efforts in economic diversification and policy reforms can help buffer against these impacts,” he said.

“Lower oil production and geopolitical tensions remain significant challenges, but with strong US economic indicators expected, there could be some stabilising effects.”

As global markets continue to grapple with economic uncertainties and geopolitical tensions, UAE investors will need to navigate carefully through this period of heightened volatility.