Executive Summary
In this paper, we sought to answer three questions about the effects of regional conflicts on the Dubai financial market. In the first question, we investigated if regional conflicts have a positive effect on the financial market. The purpose of this investigation was to find out if the market responds well to tensions, as alluded to by some researchers who have highlighted the positive effects of conflict on some financial markets. In the second question, we sought to find out the major drivers of conflicts in the financial market.
In the last question, we investigated if regional conflicts have the same effect on different segments of the financial market. Based on a review of expert opinions about the research questions, we found out that regional conflicts do not have a positive effect on the Dubai financial market. From the same source of information, we also established that the Dubai financial market is mostly insulated from the effects of regional conflicts because it has demonstrated unparalleled resilience amid a turbulent political and economic environment in the Middle East.
However, market volatilities have also affected some aspects of their growth. Based on these findings, we deduce that, at best, regional conflicts have a neutral effect on the Dubai financial market; at worst, it has a mixed effect on the financial market. We also demonstrate that conflicts affect most financial markets because they lead to the suppression of economic growth, loss of financial reserves, and the weakening of the financial system.
However, a contextual assessment of the effects of conflict on the Dubai financial market has revealed that this market is unique because it has strong economic fundamentals and a stable political, economic, and social system that reassures investors about the security of their assets and investments during conflicts.
Introduction
Researchers have made widespread attempts to understand the causes and effects of war and conflicts in human societies. Their motivation to do so is to help societies quantify the effects of such events on human societal development (Center for Interdisciplinary Research on Social Stress 49). The failure to do so would often contribute to the mollifying rhetoric that some political leaders often use to fan conflict without properly understanding how they would affect different aspects of social, political, and economic development (Guo 25-27).
While many historians have documented numerous incidents where leaders have tried to downplay the effects of conflict on human societies (Guo 25-27), economic experts have failed to provide accurate forecasts of the effects of conflicts on different economic sectors. Observers have also failed to highlight the problems associated with using faulty economic forecasts to inform economic policy decisions or influence investment decisions. This is particularly so in the Middle East, where conflict has ravaged many economies and created more havoc in others, including some western countries which share economic ties to the Middle East.
These weaknesses have created a significant gap in the literature that has failed to provide an accurate and contextual understanding of the effects of conflict on different aspects of economic development. This paper seeks to fill this research gap through fundamental analysis of the effects of regional conflicts in the Dubai Financial Market. However, before delving into the details of this analysis, we first provide a detailed analysis of the market in the section below
Background
There are many financial markets in the United Arab Emirates. The Dubai Financial market (DFM) is one of the three. The others are the Abu Dhabi securities exchange market and NASDAQ Dubai (Fathy 4). The securities and exchange commission often regulate the activities of these financial markets, except for NASDAQ, which ascribes to the principles of international financial exchange practices (Social Science Research Network 2). It is also one of two financial markets in the Emirate.
Founded in 2000 as a government-owned company, the DFM has grown in value and scope (Fathy 4). In 2006, it had its initial public offering (IPO) (Social Science Research Network 4). So far, there are more than 60 companies listed on the DFM, but the number continues to rise annually as companies apply for enlistment every year. Most of the countries listed in this financial market are UAE-based. Others are mostly from other gulf countries.
Some of the main companies operating in this market are Ajman Bank (AJMANBANK), Tamweel (TAMWEEL), Dubai Investments Company (DIC), SHUAA Capital (SHUAA), Arab Insurance Group (ARIG), National General Insurance (NGI), Emaar Properties (EMAAR), Union Properties (UPP), Gulf Navigation Holding (GULFNAV), National Cement Company (NCC) and United Foods Company (UFC). (Social Science Research Network 4)
The UAE law only allows foreign investors to own up to 49% of companies listed on the DFM (Bhavani 163-164). This is why most of the companies listed on the market are local. However, some researchers say specific companies listed on the DFM allow foreign ownership percentages to be higher than the stipulated 49% (Chamut 9). The DFM has many economic sectors that include “Real Estate, Banking, Insurance, Financial and Investment Services, Transportation, Consumer Staples, Services, and Telecommunication” (Bhavani 164). The pie chart below shows the sector analysis of the stock value traded on DFM in 2015.
Ownership Profile
The Dubai financial market has a mixed ownership structure. For example, there are institutional and retail investors who hold different percentages of ownership as profiled below
Owing to unique laws that prefer UAE owners to have a majority shareholding in companies that trade in the Dubai Financial market, UAE-owned institutions and investors have the greatest ownership percentage in the DFM, which is 83.3% (Chamut 17). The citizenry of other investors is Arab, GCC, and others. The chart below provides a comprehensive profile of ownership by citizenry category
The Dubai financial market is an important indicator of the economic performance of the UAE and the wider Middle East region. Indeed, According to the Social Science Research Network (2-3), the economic growth of the UAE has mostly come from developments in the Dubai financial market. Financial markets and their intermediaries often use information from market developments to make policy decisions and define investment choices. Such activities often attract transaction costs and information costs.
Using this information, financial markets and their intermediaries have helped to carry out different financial functions that have led to the growth of the UAE’s economy in the past decades (Social Science Research Network 3). Some of the most basic functions include the mobilization of savings, effective allocation of resources, exertion of corporate control, facilitation of risk management, and the improvement of the ease of trading goods and services (Social Science Research Network 5). They outline different functions of growth for the UAE. The most common and basic functions are technological innovation and capital accumulation. The diagram below shows this channel of economic growth
Different empirical and theoretical literature has highlighted the importance of the Dubai financial exchange market by showing that financial markets often have a long-term effect on national economies (Bray 1). The value of shares traded in the Dubai financial market helps us to have a proper understanding of the impact of the market on the country’s economic performance because a high stock value would mean that the financial market would have a strong impact on the country’s economy.
Similarly, a weak value of stock prices would imply a weaker impact on the economy (Simeunovic 1). By focusing on the impact of the Dubai financial market on the UAE’s economic performance, the Social Science Research Network says, “The stock market of Dubai suggests that it has a great impact on the economy of Dubai. The impact of the global recession did have some impact on the economy of Dubai, but with the revival in domestic demand, there has been a revival in the economy of Dubai” (5).
Based on the above statement, it is difficult to ignore the role of the Dubai financial market in the economy of the UAE and the wider Middle East region.
Research Problem
Although researchers say there are no perfect markets, different factors determine their efficiency. The most important ones are political and social upheavals because they upset investor confidence in the economy. Indeed, researchers have highlighted different cases of countries that have been affected by conflict and social unrest (Bray 1).
Most of these researchers have tried to quantify the effects of these conflicts on economies by analyzing the effects of different types of conflicts on different aspects of economic performance. The common areas of analysis have included an understanding of the effects of economies on the Gross domestic product (GDP), effects of conflicts on unemployment levels, effects of conflict on the balance of trade, and such as metrics of economic performance (Bray 1; Simeunovic 1). For example, numerous studies have analyzed the relationship between the 1987 stock market crash and the market volatilities of the time (Social Science Research Network 7).
Few studies have investigated the impact of conflict on financial markets. Even fewer studies have focused on comprehending the effects of conflict on the Middle East and more particularly the UAE, which has steered clear of some of the most common conflicts in the region, such as the 2011 Arab Spring. This gap in the literature exists because many researchers have focused on explaining how conflicts affect the financial performance of major western economies, such as the United Kingdom and the United States (US) while neglecting developing countries.
Therefore, there are few contextual studies to explain how conflicts affect economies with unique social, political, and economic dynamics, such as the UAE. This paper analyzes the impact of regional conflicts on the Dubai financial market, as a gateway investment market for international businesspersons who want to invest in the Middle East. For purposes of this study, we only focus on the financial and investment sectors (Banking, Finance, Investment Services, and Insurance) of the Dubai financial market.
Research Questions
- Do regional conflicts have a positive impact on the Dubai capital market?
- What are the major drivers of such an effect?
- Is there a similar effect through the various segments of the market?
Significance of Research
The findings of this paper would help us to understand the impact of the economic policies of the UAE on its financial markets and the overall growth of the country’s economy and the wider Middle East region as well. Using the information we derive from this paper, investors would be in a better position of making wise business choices about their Middle East ventures. This benefit arises from the fact that the Dubai financial market is an important investment driver for local and international companies to raise capital for their operations.
Since the UAE has a model economic framework for the Middle East economy, the findings of this study would also be useful in understanding the economic growth and the direction that Middle East economies are following in today’s globalized market. Similarly, the findings of this study would be instrumental in understanding the measure of risk and market volatilities in the financial market (a measure that investors and portfolio managers often seek when making investment decisions about different kinds of securities and when advising their clients about the best business decisions to make).
Lastly, the findings of this study would be useful in adding to the growing body of literature surrounding the impact of conflicts on capital markets and the wider financial industry. More importantly, they would help to provide a contextual analysis of the impact of conflicts on the UAE, and by extension, Middle East economies.
Structure of the Paper
Comprehensively, this paper has six chapters. The first chapter provides an overview of the study and sets the stage for the research. The second chapter reviews existing literature about the research issue. Mainly, it provides us with adequate insight regarding what other researchers have written about the research issue and highlights the gap in the literature that justifies the purpose for undertaking this research.
The third chapter is the methodology section. It outlines the different strategies used by the researcher to gather data, analyze it, and provide reliable conclusions. The next chapter is the fourth chapter of the study and it outlines the findings of the paper. The fifth chapter provides a discussion of the same findings, while the last chapter provides a conclusion summarizing the main findings of the study.
Results
According to chapter 3 of this paper, the data collection method adopted a triangulation technique, which allowed the researcher to get data from three sources of information – secondary data, expert findings, and event methodology. The results of these data collection methods appear below
Secondary Literature Review Findings
Researchers have given different views about the influence of regional conflicts on financial markets. Those who have focused their analysis on the Dubai financial market have not shied away from highlighting the negative impact of conflict on the market. For example, Chamut (10) said there has been a slowdown of DFM exchange in the past decade because of regional instability and low oil prices. These events have caused significant declines in the trading volumes at the DFM. The graph below provides an overview of the trade values of DFM from 2003-2015.
Many reasons explain the variations in the above trading volumes. The market reported the lowest trading volumes in 2011 when the Middle East region was experiencing political and economic uncertainty because of the Arab Spring. There was also a significant drop in trading volumes between 2014 and 2015 because of uncertainties in the energy sector, which is a significant contributor of value to the UAE’s GDP.
Although the above findings insinuate that regional conflicts would have an outright negative effect on the Dubai financial markets, some researchers have had different views regarding the same issue by saying the effects of regional conflicts on the Dubai financial market are mixed (Yousuf 1; Chamut 10). For example, Chamut (10) says the effects of the 2011 Arab Spring on the Dubai financial market were unclear and questionable.
Yousuf (1) and Simeunovic (1) provided a different view of the same debate and said that regional conflicts diminish the confidence of investors in local and regional markets. They attribute this factor (confidence in markets) to be the main currency for understanding the effects of regional conflicts on financial markets (Yousuf 1; Simeunovic 1).
Some secondary literature has highlighted the unique role of the Dubai financial market in the Middle East because they portray the market as having a lot of significance in the region. After all, it is the business capital of the Middle East (Social Science Research Network 2-3). They have also pointed out that the Emirate is among the fastest-growing regions in the Middle East (Social Science Research Network 2-3). Research studies that have pursued the same line of reasoning have presented Dubai as the melting point of East and West cultures (Bazoobandi 99-100).
They also paint the region as a unique infrastructural hub of the Middle East and an important trading hub for commodities and precious metals, especially gold and diamond (Bazoobandi 57-60). Researchers who have chosen to use Dubai’s background to analyze their views about the effects of conflict on the Dubai financial market have often argued that Dubai is an important market to study and a resilient economy in the Middle East (Yousuf 1; Simeunovic 1).
Indeed, many works of literature have also alluded to the fact that the UAE is a unique country that requires special consideration when evaluating the impact of conflicts on its financial markets (Social Science Research Network 2-3).
Comprehensively, the strategic importance of the UAE in bridging the economic policies of the east and west emerged as a significant theme in this analysis. For example, Bazoobandi (99-100)
said that since the UAE discovered oil in the 1970s, the country has had a good relationship with lenders who believe that the country is in a position to pay its debts. However, with the growing realization that oil will no longer power UAE’s economic growth in the future, Dubai is losing the trust of debt investors faster than its peers in the Middle East, except Iraq (Bazoobandi 99-100).
Relative to this finding, Chamut (13) says the cost of insuring Emirati bonds has increased to 166 basis points. Credit-default swaps have gained 31 basis points, compared to Iraq, which has gained 96 basis points because of conflicts and political upheavals affecting the country.
Many researchers have pointed out that the Political upheavals in Iraq, the conflict in Syria and the violence in the Gaza strip have worsened the economic prospects of the UAE, which is continuing to pour resources into its construction and tourism industries as strategies of securing its position as the economic hub of the Middle East (Oxford Business Group 79).
The Syrian crisis emerges as a more intriguing conflict in this analysis because it is ongoing. It has also shown us how upheavals in the Middle East could affect financial markets in the region. Compared to its Middle East neighbors, the Dubai Financial market tumbled amid fears of a US military strike on Syria after the United Nations determined that the Syrian Government used chemical weapons on its people. Before the fears emerged, the Dubai financial market was up 60%, while Kuwait’s stock was up 30%, and Oman and Qatar were up 20% (Yousuf 1).
The conflict saw the Dubai financial market tumble by several points after international fears spread amid growing prospects that the US could strike Syria. According to Yousuf (1), the stocks fell by 7% on 27 August 2013, making it the worst-performing stocks at the time. The stocks further fell by 1% after fears spread that Iran (a neighbor) could join the war. The slump in Dubai’s financial market was the most dramatic of the three Middle Eastern countries mentioned above. Yousuf explains this outcome by saying “the possibility of a strike on Syria is the biggest threat to the geopolitical landscape and global markets since the outbreak of the Arab Spring in January 2011” (7).
Broadly, researchers who have used empirical results to explain the effects of conflict on Middle East financial markets have often argued that regional conflicts affect the Dubai financial market in the short-run (Oxford Business Group 79). Usually, this is within the first few minutes of receiving the news, but they achieve stability after a while. Researchers who affirm this view have mostly focused their studies on the interest rate market and the financial exchange market (Bazoobandi 99).
Studies that further delve deeper into understanding the same market phenomenon on the money market segment have said that regional conflicts do not have a strong effect on bond prices in the days following the outbreak of a conflict (Social Science Research Network 2-3). Proponents of this point of view argue that conflicts affect some aspects of the financial market while having negligible effects on others (Oxford Business Group 79).
Key areas of analysis are the commodities exchange markets, financial exchange markets, derivative markets, future markets, and insurance markets (Social Science Research Network 3). Other key issues of analysis are the effects of speculation on financial market performance and the role of government in quelling investor fears during conflicts (Oxford Business Group 79).
The findings of a joint study by the Federal Open Market Committee and Alsharairi (750-751) found that market volatilities significantly influenced stock levels in Dubai. Their findings also document that the reaction of the stock market towards positive news was greater and more profound than the market’s reaction to negative news (conflicts and wars) (Alsharairi 750-751).
A different paper that investigated the relationship between stock market returns and market volatilities, created by conflict, found that both variables shared a positive relationship (Simeunovic 1). Nonetheless, the statistical significance of this relationship was low. However, the findings of the Federal open market committee established that there is a significant relationship between stock market volatilities and global conflicts (Alsharairi 750-751). An analysis of stock market volatilities among six emerging markets in the late 1980s revealed that there were significant changes in volatility during periods of conflict (Simeunovic 1).
The stock markets that were studied in this research included Argentina, Greece, India, Mexico, Thailand, and Zimbabwe. The researchers found that although market volatilities were uniform, they were subject to individual market factors, such as the state of the economy and the nature of the economy (Simeunovic 1). Using the bivariate GARCH model, Alsharairi (750-751) also studied the same phenomenon in Dubai and Saudi Arabia and found that volatility spillovers from conflicts affected the output growth of stock markets in the selected countries.
Comprehensively, many studies have provided abstract insights regarding the influence of conflicts on market volatilities. However, we encountered a few studies that specifically evaluated the impact of conflict on the Dubai financial market. This significant gap in literature partly emerged in the literature review section of this paper, but it was more profound in this analysis of secondary review findings.
This secondary literature review findings also brought to our attention the importance of understanding the impact of conflict on specific tenets of the Dubai financial market because different works of literature highlighted mixed findings of the same relationship (based on the nature of the economy under study and the market subsets involved).
This secondary literature review findings also brought to our attention the need to evaluate the Dubai financial market as a unique Middle Eastern market, especially considering the prevalent views of different works of literature, which have tried to portray the uniqueness and centrality of the UAE market to the economic growth of the Middle East. These insights informed the formulation of the interview protocol that the researcher used to interview the experts. The aim of doing so was to fill gaps in the literature provided by this secondary literature review findings. The findings of the expert interviews appear below.
Expert Findings
As mentioned in chapter 3 of this paper (research methodology), the researcher used semi-structured questionnaires to get the views of industry experts about the three research questions on this paper. The first one strived to understand whether regional conflicts have a positive impact on Dubai financial markets. The second one strived to find out the major drivers of such effects, and the third one sought to explain whether there is a similar effect throughout the various market segments.
Based on these questions, the researcher developed a semi-structured interview that had four main parts. The first part sought to understand the effect of regional conflicts on the Dubai Financial market. The second part sought to understand the major influences of conflict on the Dubai financial market. The third part sought the respondents’ views regarding the effects of regional conflicts on various market segments, while the last part similarly sought their views on any other issue on the research focus.
Using the snowball technique, we recruited several research participants, who worked in different fields of investment and economic development. Comprehensively, we recruited 11 professionals who worked in different sectors of the financial industry. Two of them were portfolio managers based in Abu Dhabi. Three of them were senior managers at an Oman-based investment company, while five of them were Dubai-based credit analysts. Lastly, one of them was a Chief Economist for the Dubai Department of Economic Development. The responses that the researcher received from them appear below.
What are the effects of regional conflicts on the Dubai Financial market?
In this first part of the questionnaire, the researcher asked the respondents two questions – What are the general Effects of Conflicts on Markets? How do you believe conflicts would affect Dubai’s capital market performance?
Question 1: What are the general Effects of Conflicts on Markets?
Response from the Chief Economist for the Dubai Department of Economic Development
This respondent argued that conflicts would hurt financial markets because they are often sensitive to political and economic discord in a society, or region. This respondent drew the researcher’s attention to the fact that most developed countries are experiencing stagnated or diminished returns. Therefore, many of them are looking to invest in emerging markets because they offer the greatest returns for their investments. However, he also mentioned that some emerging markets could quickly become bad investment choices because of conflict. Therefore, he demonstrated the need for all investors to make careful decisions when choosing to invest in emerging markets because of their susceptibility to conflicts.
Response from the Senior Manager at Oman Investments
The senior managers at Oman investments said that conflicts hurt financial markets because they erode investor confidence. These respondents said that global conflict was the number one risk factor for investors because it dramatically increased investment uncertainty in the market. For example, one of them said the biggest concern among investors was the failure to understand how long conflict would last. Similarly, his colleague mentioned the difficulty associated with quantifying the effects of such conflicts on financial markets.
Response from Abu Dhabi-based Portfolio Managers
The portfolio managers said that conflicts generally hurt financial markets. One of them reiterated that it is difficult to find a thriving market in a region characterized by periodic conflicts.
Response from Dubai-based Credit Analysts
This group of respondents said that conflict exerted negative pressure on financial market growth in Dubai and many Middle Eastern markets. Their views were mostly wired towards using a credit-management perspective to answer the research question. Understandably, based on their profession, the respondents said free credit flow mostly influenced the financial market by providing free credit flow to investors.
Therefore, the lack of funds affected the capital market negatively. The opposite was true because increased credit flows affected financial markets positively. Conflict eroded the creditworthiness of countries and made it difficult for investors to access funds that they would use in conflicts. In this regard, the respondents said that conflicts negatively affected the Dubai financial market and other financial markets around the world.
Question 2: How do you believe conflicts would affect Dubai’s capital market performance?
Response from Senior Managers at Oman Investments
When the researcher asked these respondents to give their views about the effects of regional conflicts on the DFM, they repeated that conflicts would hurt the DFM. However, one of the respondents said that such conflicts would have varied effects on the performance of different financial subsectors, depending on the nature and type of conflict.
Response from Abu Dhabi-based Portfolio Managers
These respondents believed that regional conflicts had an insignificant effect on the financial performance of the Dubai Financial Market. However, they acknowledged that, generally, such conflicts would affect markets. One of them said, “Dubai is a little different though. When looking at the financial performance of Dubai, you have to be contextual because of its unique social, political, and economic characteristics.” He said that Dubai continues to maintain the image of a “safe-haven” for international investors who want to do business in the Middle East.
He also believed that some of the studies showing concern for the market amid Middle East conflicts were overdone. In one statement, he said, “Take the Syrian conflict, for example; some investors used the fears arising from the possibility of a US-led strike on the country as an excuse to withdraw their money from the market. They would have done so regardless…. so it does not matter.” The respondents also said that the Dubai financial market is among the most resilient in the Middle East.
Furthermore, they said, in the last couple of years, they have observed strong retail participation in the Dubai market in the past years when most Arab countries suffered the effects of the Arab Spring. He also said there was a lot of activity on small caps and high beta names, despite the increased pessimism by some investors who believe the UAE could suffer negative economic outcomes in the wake of ongoing conflicts in the Middle East, such as the Syrian conflict. However, they did not rubbish the fact that the Dubai financial market could remain volatile in the short-term, from the ongoing conflicts in the Middle East.
Response from Dubai-based Credit Analysts
When asked to give their views about the effects of regional conflicts on the Dubai financial markets, the respondents affirmed the views of the Senior Managers at Oman-based securities who said the UAE was a unique country because of its unique social, political, and economic dynamics. In this regard, the conflict would not have serious effects on the Dubai financial market. Two respondents highlighted the role of leadership in creating this resilience. For example, one respondent said the ruling family in the UAE does not necessarily derive its power from fear and brutality, as is synonymous with other leaders in the Middle East.
He also added that the regime has a small history of political activism, but because the country has provided a good investment climate for local and international investors, it has developed a good name for itself among the citizens. Another respondent added that although some Emiratis may dislike their rulers, they are not entirely convinced that they should go. The respondents also believed that the UAE is a unique market because, unlike other Middle East governments, the Abu Dhabi-based government has done a lot for its people. Therefore, logically, people would often think that they live a better life, compared to their counterparts in the Middle East.
Therefore, the kind of government that offers them this life is inconsequential. Consequently, the possibility that Emiratis would engage in protests, like other Arab countries, is minimal. One respondent was more concerned about exploiting the effects of conflict on the Dubai financial market through the lens of the credit market.
He drew a link between the relationship of the Dubai financial market and regional conflicts by saying that political upheavals in the Middle East and the cost of debt insurance were likely to affect the access of investors to the financial market. He further drew our attention to the fact that the Dubai financial market is a product of the activities of major corporations, such as the Investment Corporation of Dubai, DP World Ltd, and Majid Al Futtaim who have raised a lot of money through bonds in the past few years.
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that the effects of conflict on the Dubai financial market are most likely to be temporary, as opposed to permanent, especially because such fears are uncommon today, compared to the past. Relative to this observation, he believes that the country’s GDP will probably increase by 5% this year on the back of strong economic fundamentals.
As regards stock market values, he believes they would soon rise again after investors start to see the positive effects of the country’s strong economic fundamentals in the wake of regional fears about the influence of ISIS and other uncertain political conflicts that would directly, or indirectly, affect the Dubai financial market. To paint a more accurate picture of the effects of the credit market on the performance of the country’s financial market, he says that the movements in CDC values mostly reflect the desire of international investors to protect their investments from conflict (particularly those of Syria and Iraq).
Nonetheless, he generally says the conflict in the Middle East is bound to affect the views of investors towards the entire economic performance of the region and not just Dubai. When asked to give his views regarding the uniqueness of the UAE and the Dubai financial market in the face of an unstable political environment, the respondent concurred with his peers who believed that the UAE’s social, political and economic dynamics insulated it from some of the adverse outcomes that have affected other Middle Eastern countries.
He added, “You see, the UAE has a unique type of democracy that works well for its citizens. In as much as it may look top-down, it is open and inclusive because the UAE rulers are often open to hearing the views of the Emiratis.” Using the above assertion, he affirmed the views of respondents who believed the UAE was a unique market that required further analysis into how it can remain resilient in the face of an uncertain political environment.
Question 3: What Impact would Conflicts have on Commodity Prices in the Dubai Financial Market
Response from the Chief Economist of the Dubai Department of Economic Development
When asked to state how conflicts would affect commodity prices on the Dubai stock exchange, this respondent said that commodity prices would be negatively affected. He justified this statement by saying unrest would limit the supply of resources that firms would need to produce goods and services, thereby increasing the cost of commodity prices. He also pointed out that our main point of analysis should be “access” because conflicts limit an economy’s access to factors of production.
Responses from Dubai-based Credit Analysts
This group of respondents affirmed the views of the above respondent because its members said conflicts limit the access of a country’s economy to the materials they would need to function. When asked to provide more details about this assertion, they said the biggest concern created by conflict was the creation of uncertainty about the future availability of commodities, thereby increasing their prices. Indeed, as supply shortages bite, people are bound to pay more for the available products and services.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents said that conflicts would lead to thinning trade volumes in the Dubai financial market because of an increase in commodity prices, which would be the direct result of conflicts. When asked to give an example, the respondent said the most important commodity price to look out for in the Dubai financial market was the price of oil, which would easily affect trading volumes in the market. Relative to this view, one of them said, “This year is potentially going to be a difficult year for many brokerage firms in the Dubai financial market because of low oil prices, which have led to low trading volumes.”
In this regard, the respondents said the stability of oil prices would play a significant role in influencing the stability of the Dubai financial market. When asked to give their views about the effects of the money market on the price of gold, they argued that conflicts have a substantially weaker effect on the commodity as opposed to oil, or treasury notes. One of the respondents further clarified that regional conflicts in the Middle East have not generated considerable “fear” among investors to move towards “safe” or liquid assets.
Responses from the Senior Manager at Oman Investments
When asked to explain how conflicts affect commodity prices in the Dubai financial market, this group of respondents said that conflicts increased the value of gold and precious metals, as businesspersons look for “safe” investments that would not be easily affected by uncertain market conditions.
They particularly pointed out that the price of gold would increase during times of conflict because many investors would be looking to secure their investments by buying gold. One of the respondents affirmed the role of gold in influencing market activities at the Dubai financial market by saying businesspersons trade more than 20% of the world’s gold in the Emirate. He further pointed out that the gold traded in Dubai is worth more than $70 billion.
Question 4: What Impact would Conflicts have on Money Markets in Dubai?
Response from the Chief Economist of the Dubai Department of Economic Development
According to this respondent, the war would increase activity in the money market because it intensifies spending and borrowing patterns. Particularly, governments increase their borrowing ceilings during war periods to finance wars. One of the respondents also pointed out that there is always an upswing of “war bonds” during conflicts because governments often offer such securities to finance their wars.
Responses from Dubai-based Credit Analysts
According to this group of respondents, conflicts may cause a lot of vibrancy in the money markets as countries work to pay for conflicts, or to pay for wars. One respondent pointed out that deficit financing and printing of more money could be direct outcomes of conflicts.
Responses from Abu Dhabi-based Portfolio Managers
One of the respondents was quick to point out that war risks would hurt the money markets in most countries. He gave the example of the US money market, which had significant movements in financial variables three months after the Iraqi invasion.
Responses from the Senior Manager at Oman Investments
One of the respondents said that regional conflicts would harm treasury yields and the Dirham. He further clarified that this outcome would suffice from the fact that most investors would see the prospect of war, or conflict, as having a downward pressure on the UAE economy. This would mean that it would not have a risk on the investor’s risk preferences. These assertions stem from the fact that these outcomes would be a consequence of the effects of war risk, as opposed to the real causes of conflict.
Question 5: What Impact would Conflicts have on the derivatives market in Dubai?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that he could not correctly predict the influence of regional conflicts on the derivative market. When asked to explain why this is so, he said the derivative market is highly unregulated and impossible to correctly predict how it would be affected by volatilities in the financial market.
Responses from Dubai-based Credit Analysts
This respondent believed that the influence of conflict on the derivative market would be the same as the influence of speculative activities on the financial market. When asked to provide a more definitive response, the respondent said regional conflicts would have a positive effect on the derivatives market.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents said that the effects of regional conflicts on the derivative market would depend on the nature of the market. One of the respondents said over the counter interdealer markets would benefit from conflicts because speculative activities would lead to high demand for derivatives. Comparatively, they said future markets would not have significant movements because of regional conflicts.
Responses from the Senior Manager at Oman Investments
This group of respondents said that regional conflicts could have a negative or positive influence on the Dubai financial market, depending on the nature of the conflict.
Question 6: What Impact Would Conflicts have on Future Markets in Dubai?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that the future market was a subset of the derivative market and since he could not provide a definitive answer regarding the influence of regional conflicts on the derivatives market, he could not do the same in the futures market.
Responses from Dubai-based Credit Analysts
This group of respondents said that regional conflicts could cause equilibrium future prices to go either above or below the expected future price. In this regard, they believed that regional conflicts would have a mixed effect on the futures market of the Dubai financial market.
Responses from Abu Dhabi-based Portfolio Managers
According to the portfolio managers, the futures market would benefit from regional conflicts because traders would want to hedge their risks in this market during times of conflict. One of the respondents said he knows of a large institutional investor that prefers to engage in the futures market as a risk-management process. Therefore, whenever there is a heightened risk profile, there is likely to be increased activities in the futures market, as traders rush to protect themselves of heightened risks.
Responses from the Senior Manager at Oman Investments
This group of respondents was unsure about the question and its relation to the performance of the Dubai financial market. They believed the same response they gave on the influence of regional conflicts on the derivatives market would apply to this question as well. Furthermore, they said the futures market is a relatively underdeveloped area of the financial sector and experts could not fully provide an accurate prediction of how regional conflicts would affect it.
Question 7: What Impact would Conflicts have on Insurance Markets in Dubai
Response from the Chief Economist of the Dubai Department of Economic Development
According to this respondent, conflicts have a knockdown effect on insurance markets. Particularly, he drew the researcher’s attention to terrorism insurance because he believed it suffered the greatest volatilities during the conflict. To clarify this issue, he said, “The rise of ISIS in certain parts of Syria and Iraq has had a significant impact on the insurance market because observers are not sure whether both countries would survive under the scathing attacks.” Based on such assertions, this respondent believed that conflicts would harm the insurance market.
Responses from Dubai-based Credit Analysts
This group of respondents said that regional conflicts harm the insurance market because underwriters are often cautious to insure risks that emanate from regional conflicts. When asked to be more specific about what the market would be cautious about, the respondent added that many insurance companies would be worried about line sizes.
Responses from Abu Dhabi-based Portfolio Managers
One respondent in this group of professionals said that he has had a lot of experience in the insurance sector and more so during conflicts. He said that the insurance market is often wary to ensure risks during times of conflict. The pricing often reflects this fear because insurance prices skyrocket during conflicts. They also said the same outcome would suffice when there are heightened political tensions. Another respondent seconded this assertion and said that his experience working in different portfolios have taught him that insurance companies become jittery about the possibility of insuring risks during the conflict. He clarified that most companies require a lot of information before they insure risks during times of conflict. He emphasized that many insurance companies need a lot of information about the risks being insured, and details about business continuity before they choose to insure specific risks. These concerns made him argue that conflicts harm the insurance market.
Responses from the Senior Manager at Oman Investments
Two respondents in this group of participants believed that conflicts had a positive influence on insurance companies because the insurance market “gets excited” when clients pay high premiums. One respondent said,
Heightened political tensions often lead to high premiums and the insurance market gets excited about the potential to increase their revenues. Think about it… insurance companies prey on people’s fear. They make a profit by making you fearful that certain adversity would affect you. Consequently, you choose to protect yourself from what you believe is a real risk that would affect you, and interestingly it is often not the case because these risks often do not suffice.
I do not know what you believe, but conflicts in the Middle East are rare, but guess what? There is a perception out there that the region is largely unstable and insurance companies are “milking it.” They are laughing all the way to the bank and their stocks are similarly becoming more valuable, especially in today’s world where western powers are becoming increasingly hesitant to engage in conflicts in the Middle East.
Comprehensively, this respondent believed that conflicts would have a positive effect on the insurance market.
Question 8: What Impact would Conflicts have on Dubai’s Financial Exchange Markets?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that conflicts have a significant impact on financial exchange markets because the uncertainty among investors causes financial market volatility. For example, he said that if the UAE engaged in a proxy way with any of its Arab neighbors, the value of the Dirham would decline, as the value of US dollars would increase because many investors would be looking at the latter as a “safe bet” compared to the former.
Particularly, this respondent was quick to point out that, many investors would be holding on to short-term US dollars as they try to figure out the direction that the war would follow. After finding out the course of the war, the value of the dollar would drop on average. To prove how conflicts would affect the financial exchange market, the respondent said that most countries, which are engaged in conflict, in the Middle East, have higher levels of volatility in their financial markets compared to those that are not engaged in war.
Responses from Dubai-based Credit Analysts
This group of respondents said that the foreign exchange market was among the most active submarket categories in the Dubai financial market. Based on this assertion, they believed that conflicts would affect this market through fluctuations in exchange rates and currency values. When asked to be more specific about the effects of conflict on the financial exchange market, the respondents argued that conflicts and political tensions would harm the market because of high volatility in the value of a country’s currency.
One of the respondents also brought the researcher’s attention to the cost of rebuilding (after conflicts) because nations often use cheap capital that would often be obtained through low-interest rates. The low cost of capital would affect the currency market negatively because the country would be flooded with cheap money. Inflation is often a common outcome in such situations.
One of the respondents in this group of participants also alluded to some of the potential positive effects of war on financial markets and gave the example of America’s entry into the Second World War, as an example of how conflicts could jumpstart an inactive economy by creating excitement in the financial market. However, one respondent was quick to point out that no human society should choose increased economic activities at the expense of human life.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents also shared the same views as the credit analysts because they said conflicts and political uncertainty would harm the financial exchange market. However, their reasons for saying so differed from the views of analysts who believed that uncertainty like monetary and fiscal policies caused the biggest volatility in the market.
Particularly, they said the conflict could easily affect the monetary policy of a country, thereby affecting the financial exchange market by extension. When asked to give examples, one respondent said a conflict pitting the people against a regime could see many traders buying a certain currency in the hope that a regime change could lead to better economic fortunes for them. The opposite is also true because if a pro-economy regime were on the precipice of being ousted, the traders would sell off the country’s currency, knowing that the possibility of future economic doom is real.
Responses from the Senior Manager at Oman Investments
According to this group of respondents, conflicts would harm currency markets in the short term. They cited the destruction of infrastructure and the decrease of citizen morale as some issues that could cause this outcome. One of the respondents highlighted the point on infrastructure by saying that the Dubai financial market cannot withstand the impact of infrastructure damage because it would limit the economic output of the country and, by extension, affect the market system.
The Major influences of Conflict in the Dubai Financial Market
Question 1: What Factors do you think to Influence the performance of Financial markets Worldwide?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said the economic and institutional development of a country was the one single factor affecting the performance of financial markets worldwide. When asked to give an example of this assertion, he said these factors influenced post-conflict recovery.
Responses from Dubai-based Credit Analysts
This group of respondents said that the economic structure of a country was the single most influencing factor affecting the performance of financial markets worldwide. For example, one of the respondents said that the markets of non-oil countries and oil-dependent countries fared differently during conflicts.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents believed that the response of the international community towards conflicts affected the performance of financial markets worldwide. When asked to elaborate on this fact, they said that countries that are likely to be protected by the international community would find it easy to convince investors that their assets are secure in their markets, as opposed to those which cannot give this guarantee.
Responses from Senior Managers at Oman Investments
The respondents sampled in the cluster group said the duration of war influenced the performance of financial markets worldwide because most protracted wars have a greater (negative) effect on markets, as opposed to those that take a short time.
Question 2: What Conflict-Related Factors do you think to Influence the Performance of the Financial Market
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that uncertainty was the most common influences of financial market performance in the Dubai financial market. He particularly drew our attention to the fact that most conflicts have unique social and political characteristics. Therefore, it is difficult to replicate the same lessons learned in one conflict in another conflict.
Furthermore, with changes in technology, particularly military technology, it is difficult to establish whether current conflicts would have the same effect on financial markets as past conflicts do. In this vein, he said, “This uncertainty makes it difficult for investors to determine when to sell shares that have not performed well or to know when to buy those that are promising.” Comprehensively, he believed that it is wrong to apply the same lessons or responses from one conflict to another because they have unique dynamics. Furthermore, he drew the researcher’s attention to the role of uncertainty, which affects investor confidence and risk appetite.
Responses from Dubai-based Credit Analysts
This group of respondents also alluded to the attribute of uncertainty as to the main characteristic of wars that made them impactful to financial markets. They believed that in today’s technologically advanced world, it is difficult to comprehend fully what wars and conflicts can do to financial markets and human societies. One of the respondents pointed out that many countries today have nuclear weapons and no one knows how the world may become if differing parties choose to use them.
The same concerns emerged after the development of hydrogen bombs because experts found it difficult to estimate the effect of such a conflict on the society, thereby making it difficult to hedge against its risks. Nonetheless, another respondent expressed optimism in the fact that most financial markets in the world have learned to be resilient in the face of emerging sporadic conflicts around the world, especially after realizing the success that the world’s superpowers have achieved through diplomatic means. In this regard, he believed that there was a low probability that the world would come to see an all-blown out war among nations.
Responses from Abu Dhabi-based Portfolio Managers
Panic is one attribute about conflicts that this group of respondents pointed out to be the greatest influence of stock market performance. The respondents drew our attention to the possibility of market panic, which may lead to the mass selling of shares, or company stocks, thereby leading to the loss in market performance for a country. One of them said panic is a huge cause of concern to many investors and market players today because technology has made it possible for buyers and sellers to sell or buy shares and stock instantly. To expound on this point, one respondent said,
Take the world war one, in 1914, for example, there was a massive shutdown of European money markets because there was fear of massive selling, which would be preempted by massive panic among investors. Analysts understood that panic could lead to massive selling, a drastic fall in prices, and a possible movement of capital out of major economies in Europe. Therefore, closing the stock market was the best option in this regard.
Comprehensively, these respondents believed that panic was the most significant attribute of wars that could affect financial market performance.
Responses from the Senior Managers at Oman Investments
This group of respondents said that conflicts influence the performance of financial markets because of their physical effects on the infrastructure of countries and the movement of factors of production. For example, one of them said that wars destroy the physical infrastructure of countries and inhibit the movement of people who are an important factor of production. The destruction, of ports, railroads, airports, and entire neighborhoods are common aftermaths of wars that may affect the financial performance of markets because companies rely on such infrastructure and people to provide goods and services.
Question 3: What Aspects of Conflict Affect Financial market performance?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that wars caused difficulties in forecasting market outcomes, thereby creating a problem for investors who want a steady return on their investments. He said, “For example, investors cannot correctly predict how long war would last, or how long they should wait to withdraw or invest their money. Moreover, they would not correctly understand how different stocks would be affected by conflict.”
Although he alluded to the problem of difficult forecasting of market outcomes, his response also pointed to the attribute of uncertainty as a key determinant of market outcomes.
Responses from Dubai-based Credit Analysts
When asked to state the unique aspects of conflict, which would affect financial markets, the respondents said conflicts have decreased people’s savings potential. When asked to clarify this point, he said savings outline the engine to the success of financial markets because they provide people with the money to invest. When conflicts emerge, an economy experiences a decrease in savings.
One of the respondents estimated that, around the globe, people save about $5 billion for investment. The researcher asked this respondent whether he thought conflicts would only motivate people to hold on to their money. He said that it is true that people would hold on to their savings (longer) during conflicts. However, any economic benefits that would emerge from the same problem would be offset by a decreased productive capacity in the financial markets and the wider economy.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents said that conflicts hurt the financial market because they increased the risk of investment. One of them said,
What it does is decrease the certainty of investors getting their money back…. I mean investors get very uncomfortable about the possibility that they may never get their money back. Think of a real estate investor, we have many of them here; they would not be guaranteed that they would get adequate proceeds from their investments if the country was at war. I mean, I have already told you about the destruction of infrastructure because of war. Which investor in their right mind would choose to put their money in such an economy?
Broadly, these respondents believed that conflicts would hurt the Dubai financial markets by heightening the risk profile of different investment categories.
Responses from Senior Managers at Oman Investments
When asked to explain the unique aspects of conflicts that affect financial markets, the respondents said that wars divert resources from productive sectors of the economy to the military sector. Consequently, the government decreases non-military spending as most resources are used for purposes of winning wars. Therefore, the education sector, the health sector, and the infrastructure sector are some economic areas that suffer from perennial conflicts. One of the respondents said that countries that are often at war usually go all out to make sure they emerge the victors. This means that they would starve any other economic sector to meet their primary goal, which is to win a war. He remarked
….. You can guess it; companies that depend on non-military productivity suffer as a result. Their stock prices decline because investors do not know the extent that the conflicts could damage their primary sectors. In turn, they shy away. I do not see why only a few companies or economic sectors should benefit from improved productivity during conflicts while the rest suffer because of the same. Consequently, I believe that, generally, conflicts could negatively affect most sectors of the Dubai financial market because we have few sectors in the market that depend on military warfare anyway. This is the main reason why I oppose the views of economists who say that conflicts positively affect economies.
Question 4: What is the Role of Speculative Practices in Influencing the Response of the Dubai Financial Market to Regional Conflicts?
Response from the Chief Economist of the Dubai Department of Economic Development: When asked to describe how speculative practices in the Dubai financial market could influence the market’s response to regional conflicts, this respondent said that they increased fear among investors and caused panic in the market. He also pointed out that he did not support speculative activities because they could cause mass panic in the market, thereby leading to the massive scale, or purchase of shares – an action, which may be unsubstantiated. In sum, he believed that speculative practices would exaggerate the effects of conflict on the Dubai financial market.
Responses from Dubai-based Credit Analysts
This group of respondents said that the effect of speculative practices on the Dubai financial market is similar to the effect of hedging firms on the same market. They observed that the greatest effects of speculative practices on the financial market emerged in the financial exchange market, stock market, and commodities futures market.
When asked to be more specific about the effects of speculative practices on the financial market, during times of conflict, the respondents said that speculative practices should not necessarily harm the market because they help sustain stock market activities even during times of economic gloom. One respondent said, “Take an example of conflict times, speculators often buy stocks that are neglected by many investors because they hope to profit from selling them when the right time comes. In this regard, they boost stock market activities at a time when we would not be expecting any activity at all.”
Another respondent affirmed the views of the above participant by saying that speculators help to raise the price of stocks when the market would be suffering from a slump because of political tensions or conflicts. In this regard, the respondents believed that speculators were important players in the Dubai financial market and they helped to increase the market’s resilience during times of conflict.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents affirmed the views of the above-mentioned participants because they believed speculative activities positively influence the response of the Dubai financial market to regional conflicts. When asked to clarify this point, they said that speculative practices helped provide market excitement when people only thought of withdrawing their money or stalling their investment decisions during times of conflict.
One of the respondents also said that the exclusion of speculators in this market would increase the spread between the asking and selling prices of stocks, thereby making it difficult for new entrants to participate in the market at a price that they wanted. Another respondent believed that speculators helped market players to find people to buy or sell commodities, or stocks, during times of conflict. In this regard, the respondents believed that speculative practices helped to positively influence the response of the Dubai financial market in the wake of rising regional conflicts.
Responses from the Senior Manager at Oman Investments
According to this group of respondents, speculative practices are beneficial to the Dubai financial market because speculators undertake an important role of risk-bearing, which is beneficial to traders in the financial market. One of the respondents said speculative activities give traders the option of selling their stocks to potential buyers if they feel that they would lose their value when conflicts break out. Without speculators in the market, stock owners would not have the option of selling their stocks before an adverse event occurs; instead, they would have to wait for their fate during and after a conflict.
Using this analysis, the respondents said that speculative practices in the Dubai financial market gave traders a tool for hedging their risks during times of conflict. One of the respondents further said that speculative activities could help improve market activity because they embolden investors to take on risks during times of conflict. Stated differently, the respondents believed that speculative activities help to improve the response of the Dubai financial market to regional conflicts.
Effects of regional Conflicts on Various Market Segments
Question 1: What regional Conflicts have taken place in the last three decades that have influenced the Dubai Financial Market
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that the Arab Spring and the Syrian civil war are the main conflicts that have recently affected the Dubai financial market. Although he clarified that both conflicts are related, he emphasized the need for examining them differently. When asked to give examples of conflicts that have affected the market in the past, he mentioned the 2003 invasion of Iraq as a notable conflict that not only affected the Dubai Financial Market but the global financial market as well. When asked to state the criterion for choosing these conflicts, the respondent said that the countries involved in the conflict-affected the economic structure of the region.
Responses from Dubai-based Credit Analysts
This group of respondents said that the conflicts and tensions between Saudi Arabia and Iran were the most impactful conflict of the Middle East in the last few years. When asked to explain why they believed the clash between the two countries was the most significant conflict in recent times, they said the warring countries represented among the top three biggest economies of the Middle East. They added that such a conflict would affect not only the Dubai Financial Market but also the global economy at large because both countries are also among the largest global oil producers.
Responses from Abu Dhabi-based Portfolio Managers
The Abu Dhabi-based portfolio managers of the Middle East who the researcher interviewed believed that the political and economic instability created by ISIS ((Islamic State of Iraq and al-Sham) was the greatest political force that caused jitters among investors in the Dubai Financial market, within the last few years. When asked to expound on this assertion, the respondents said that this terrorist organization, which is an offshoot of Al Qaeda seems well-financed and well organized to cause conflict not only in the Middle East but also in other parts of the world. They drew the researcher’s attention to the fact that the military group successfully overran several cities and towns in Iraq. They also clarified that this group is still active in many countries of the Middle East.
Responses from the Senior Managers at Oman Investments
The senior managers at Oman investments outlined the Lebanese civil war that occurred between and 1990 and Iraq’s invasion of Kuwait as the most notable conflicts in the Middle East that affected financial markets in the UAE. When asked to state the criterion used for choosing the conflict, they responded that the countries involved in the conflict had a similar cultural and historical background with the UAE and had a strong regional and global importance, especially in terms of their economic outputs, or inputs. When asked to clarify this point further, the respondents said the countries relied on the energy sector to finance most of their budgets.
Question 2: How have these conflicts influenced the Sector’s financial performance?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent said that the above-mentioned conflicts affected the financial performance of the Dubai financial market through increased inflation and large fiscal and current account deficits. He further clarified that,
I know these effects do not directly affect the companies participating in the Dubai financial market, but they affect investor decisions, which should be the most important driver for your analysis. Indeed, if investors feel that inflation is high, or the country is running current account deficits, they would downsize the market’s performance and similarly lead to its decline.
Responses from Dubai-based Credit Analysts
This group of respondents said that the conflicts mentioned in this paper affected the performance of the Dubai financial market by reducing foreign reserves and creating a weak financial system. However, they were quick to point out that these effects depended on the macroeconomic variables of different countries.
Responses from Abu Dhabi-based Portfolio Managers
When asked to explain how these conflicts influenced the financial sector, this group of respondents retorted that they decreased people’s power of savings. They further added that those who had enough savings tucked away for investments were afraid to use them for the same purpose because of the uncertainty brought about by conflict. One of the respondents pointed out that first-time investors were most vulnerable to the effects of conflict because they were highly insensitive to market volatilities brought by conflict. Another one added that the increased hesitation to invest during times of crises would not only dampen activities at the Dubai financial market but could also cause a significant decline in the country’s overall economic performance.
Responses from the Senior Managers at Oman Investments
The senior managers at Oman investments adopted a money market approach to answering the research question by saying that the above-mentioned conflicts would negatively affect liquidity and money markets in the UAE, thereby causing volatilities in the Dubai financial market. One of the respondents said,
The price that warring factions pay for capital during times of conflict is high, such that even the most active financial markets would feel the heat. Investors would react accordingly…. Think about it this way, if a war lasts for one year, as opposed to six months, the market would adjust interest yields accordingly to reflect the high risks and consequently cause a slump in trading.
One of his colleagues added that
I think it is also important to point out that the prices of government bonds could also significantly decline during times of conflict. In my experience, I have seen investors become exceedingly nervous about the prospect of repudiation, in such times. In this atmosphere, they would hold on to their investment capital and not partake in any economic activities. What do you think this means for the financial market – Doom!
Question 3: Are there some subsections of the Financial Market that are more resilient than others are when it comes to resisting the pressures that come from Conflicts?
Response from the Chief Economist for the Dubai Department of Economic Development: When asked this question, this respondent was unsure about his answer because he believed that the resilience of different subsections of the financial market varies with the time.
Responses from Dubai-based Credit Analysts
This group of respondents believed that the commodities market would show the greatest resilience in the wake of conflict. When asked to state why this is so, they said this sub-market has shown increased resilience in the past. One of them said, “Look at the recent slump in crude oil for example. It negatively affected most financial markets in the Middle East because they relied on the oil industry. However, the Dubai financial market showed undue resilience to the same market conditions.” Comprehensively, these respondents believed that the commodities market would demonstrate the greatest resilience in times of conflict.
Responses from Abu Dhabi-based portfolio Managers
When asked to describe any subsectors of the Dubai financial market that would show resilience during times of conflict, this group of respondents said that the financial exchange market would show undue resilience because the UAE has adequate foreign exchange reserves to cushion its markets from adverse volatilities caused by conflicts. One of the respondents said that, recently, this financial advantage helped to cushion the market from the effects of a steep decline in global oil prices. Another respondent said the financial exchange market in the UAE would show the greatest resilience in the face of conflict because the UAE government would not hesitate to use its reserves to promote spending and growth during times of crisis. After all, it is firmly committed to seeing the non-oil sector grow.
Responses from the Senior Manager at Oman Investments
This group of respondents believed that the credit market would show the greatest resilience in the wake of uncertainty and political upheavals in the region. When asked to justify this position, one of the respondents said that the credit market had the strongest fundamentals among most sectors of the Dubai financial market.
Question 4: How do conflicts affect Foreign Participation in the Dubai Financial Market?
Response from the Chief Economist of the Dubai Department of Economic Development
This respondent chose to provide a contextual approach to this question by saying that Dubai would be negatively affected by conflict because 90% of the population in the Emirate is foreign nationals who work in some of the biggest companies trading in the Dubai financial market. He further explained that
The objective of economic development planners in Dubai is to ensure that foreign investors contribute to a virtuous circle. This can only be achieved when the peacebuilding initiatives in the political space contribute to the creation of an environment where investors feel safe. Furthermore, the impact of individual investors would only be felt in the financial market, to the extent that they are managed in a conflict-sensitive way.
Comprehensively, this respondent said the conflict would negatively affect foreign participation in the Dubai financial market because it would signal to investors that the country is not open for business. When asked to give examples to explain this assertion, the respondent said that the entry of Coca Cola in Bosnia in the 1990s signaled to the world and international investors that the country was open for business. HSBC’s decision to open a bank in Sri Lanka also had the same effect because if investors are “scared” from operating in a country because of conflict, or any other reason, they are bound to send a signal to the world that the aforementioned country is not receptive to international investors.
Responses from Dubai-based Credit Analysts
This group of respondents was quick to clarify that conflicts would not only affect the Dubai financial market, but the entire region as well because most foreign investors base their operations in Dubai to cover the wider Middle East region. Nonetheless, this group of respondents was adamant that conflicts would decrease foreign participation in the Dubai Financial market because few foreign investors would be willing to invest in a market that the government does not guarantee the security of their investments.
This respondent also drew the researcher’s attention to the effects of conflict on international relations by questioning how international companies should behave when operating in conflict-ridden countries. Particularly, he drew the researcher’s attention to the extent of their responsibilities in such times. When asked to give an example, one respondent said the conflict in the Niger delta highlights the conflicted position that foreign investors are in, considering they have a social responsibility to the local hosts and corporate responsibility of making sure investors get value for their investments. Nonetheless, this group of respondents did not waiver on the fact that conflicts would decrease foreign participation in financial markets.
Responses from Abu Dhabi-based Portfolio Managers
These respondents argued that conflicts would affect foreign participation in the Dubai financial market, but did not believe that the same phenomenon would significantly affect the operations of the market in general. When asked to explain further on this point, one of the respondents said, although the UAE does not have a foreign investment law, corporate law does not allow companies that trade in this market to have more foreign than local ownership.
Responses from the Senior Manager at Oman Investments
This respondent was cautious to say that foreign direct investments in financial markets could be a source of peacebuilding (at best), but some circumstances could cause it to become a source of conflict. This respondent also said that investigating how conflict influences financial markets, particularly, the Dubai financial market, should not be conceived from a narrow perspective because the interconnectedness of global conflicts and markets today is dynamic and complex. For example, he drew the researcher’s attention to the fact that some markets in the Middle East would continue to work normally even when conflicts are ongoing. When asked to state whether the Dubai Financial Market was one such market, he refused to commit to his assertion and instead said that
Look…. all I can say is that few investors, whether foreign or domestic, would be willing to allocate large chunks of their investments to financial markets, Dubai or otherwise, during conflicts because of the instability and insecurity that such political conditions create in the market.
One of his colleagues also said that even when a war is over, few foreign investors would be willing to make serious commitments in a financial market because of the instability and insecurity that often prevail when the conflict ends. He added, “They are just not sure if another war would break out.”
Question 5: What is the relationship between Conflict and Financial Markets in the Dubai Financial Market?
Response from the Chief Economist for the Dubai Department of Economic Development: This respondent said that large asset owners in the Dubai Financial market have a huge role to play in influencing the relationship between conflict and financial markets. In this regard, he said, “It would be in the financial self-interest of large asset owners to reduce the impact of conflict on the Dubai Financial Market.”
When asked to expound further on this point, the Chief economist said the large asset owners could do so by providing targeted donations or by participating in impact investments. He further said that using large non-governmental organizations to do so would be the best approach of going about the issue.
Responses from Dubai-based Credit Analysts
Most of these respondents said that financial markets are often more volatile under the pressures of conflict than people believe. For example, one of them said, “Most financial markets are more volatile than is economically justified by the conflicts that characterize our modern society.” Another one said the relationship between conflicts and the Dubai financial market is often defined by human attributes such as anger and fear.
Greed and cognitive biases also emerged as other humanistic attributes affecting this relationship. One of the respondents pointed out that, while it is debatable whether investors in the Dubai financial markets overreact to regional conflicts, they are often not ignorant about events in the global stage.
Responses from Abu Dhabi-based Portfolio Managers
This group of respondents chose to answer this question by giving a contextual approach to the relationship between conflicts and financial markets. They said financial markets are not immune from conflicts because wars have always changed economic patterns and trade relationships. One respondent was critical to explain that wars have always influenced technological developments, disrupted markets, and drained wealth from economies.
When asked to be more specific about the Dubai financial market, they claimed that conflicts caused capital depletion and reduced activities of the financial market. When asked to expound on this issue further, one respondent claimed that conflicts create intense destruction of capital, such as the destruction of factories and cities. Another one was more vocal in explaining this fact by saying
…for example, look at Iraq, whole cities have been destroyed by political conflict for no reason at all. This is a destruction of capital. Countries that suffer from such conflicts not only destroy their wealth but also scare other investors from channeling their wealth to their markets because no one wants to lose money. The UAE would not be any different from its Arab neighbors. Working as a portfolio manager, I am aware of how our markets would be crushed by the possibility of a protracted war…. I think financial markets in the UAE could suffer worse economic fortunes through conflict because we have built a reputation as a haven of investment.
Responses from the Senior Manager at Oman Investments
This group of respondents painted a mixed analysis of the effects of conflict on the Dubai financial market by saying that they would bring both positive and negative effects of war on the financial markets. When asked to explain the positive effects of conflict on markets, they said conflicts could easily induce excitement in markets that are tied to war spending. For example, companies that have contracts with the military would experience a surge in share prices when political tensions, or the possibility of wars, is real. One of the respondents was also quick to add that conflicts could increase capacity utilization in dormant economies and reduce unemployment, at least in the short-term. They believed these effects could increase activity in the Dubai financial market, especially because some Middle East companies that trade in it have a strong political connection to different regimes in the region.
Conclusion (AOB)
Response from the Chief Economist for the Dubai Department of Economic Development
This respondent said that when investigating the relationship between conflicts and the Dubai Financial market, it is pertinent to acknowledge that most investors often expend many resources on conducting market analyses to determine how conflicts would affect their investments. He further remarked that “The analysis that these investors make in the world market often determines their perceptions of future outcomes in the financial market. What keeps investors motivated and what drives the market is their conviction or motivation to sell financial assets. Of course, this is because of their market analysis.”
Responses from Dubai-based Credit Analysts
These respondents said when analyzing the impact of regional conflicts on the Dubai financial market, it is important to understand that, economic and market dynamics often change as financial experts understand the market better and readjust their strategies to protect themselves from the risks associated with conflicts. Particularly, they drew the researcher’s attention to the increased sophistication of financial markets through hedging and the development of derivatives and futures markets as examples of market sophistication.
Responses from Abu Dhabi-based portfolio Managers
This group of respondents believed that the researcher had done a great job of examining the most important aspects of financial market performance and the effects of conflict on the Dubai financial market. They were also happy to have participated in the research and encouraged the researcher to contact them if any details needed further clarification.
Responses from the Senior Manager at Oman Investments
This group of respondents said that the analysis of the effects of regional conflicts on the financial market performance of the Dubai financial market should be understood through different metrics and not from a narrow perspective. They were sure that the researcher’s findings would provide a holistic understanding of the effects of regional conflicts on the Dubai financial market.
Event Methodology Findings
The findings of the event methodology emerged from an analysis of the effects of the Arab Spring on the Dubai financial market. In December 2010, a young, Tunisian vegetable vendor set himself on fire in protest of authorities denying him the right to sell his vegetables in a Tunisian market. This act of bravery set the stage for one of the Middle East’s most iconic events, where people started to stand up against existing regimes and demand for democracy and significant political and social changes in governance.
These protests led to what we know today as the Arab Spring. In the wake of the Arab Spring, the aftermath of the political protests was uncertain and unpredictable as they sent unclear signals about the economic future of the affected countries and the wider Middle East region. Although the protests strived to entrench democracy in the region, the message it sent to investors, particularly to relatively stable countries, such as the UAE, was unclear. To get a clearer understanding of the effects of the Arab Spring on the Dubai financial market, the findings of the event methodology appear below
We conducted the methodology of the event based on the objectives of the research. Indeed, as mentioned in the first chapter of this report, we focused on the banking, investments, and insurance sectors as the most distinguishable sectors of the DFM, which were useful to our scope of analysis. To get a clearer understanding of the research phenomenon, we also used the Cumulative Abnormal returns (CAR) method as stipulated in the methodology section (chapter 3).
The abnormal return is a term that investors commonly use in event study methodologies to calculate different returns for samples selected for purposes of answering the research questions. Typically, the abnormal returns under the null hypothesis would have a joint normal distribution. The mean and conditional variance would also typically be zero. The CAR of the three selected sectors appears below.
The above graph shows the cumulative abnormal returns for earning announcements between the periods of January 2014 to October 2014. We calculated this index using the market model. It provided the normal return measure. The following table shows the different calculations we obtained of CAR using Excel
Table 1: Variations of CAR using Excel
(Source: Created by author)
The level of statistical significance emerged at 5%, for the t-statistic. This fact was true if the absolute value was more than 1.96. The cumulative abnormal returns and the t-test of the three sectors emerge below
Table 2: CAR Results
(Source: Created by author)
Similar to the excel calculations, the statistical significance emerged at a 5% confidence level. This value was only true when the absolute value was greater than 1.96.
Table 2 above provides an overview of the stock market performance for Dubai’s three economic sectors – banking, investments, and insurance sectors, through an analysis of the CAR. The banking sector was the best performing sector through the Arab Spring. However, there were insignificant average positive returns during the first months of conflict. The market model CAR for the banking sector was 0.352%. The standard error was 0.020. From this finding, we find that the event studied had some impact on the banking sector.
The investment sector reported lower stock movements, compared to the banking sector, meaning that it had a stronger resilience than the banking sector. The sample abnormal returns for this sector were 0.402%. The standard error was 0.034. This finding shows that the event had at least a 40% impact on the investment sector. This value emerged through the rise in CAR. A deeper analysis of the statistics shows that the CAR for the investment sector increased significantly during the first few months of conflict.
However, the values stabilized soon afterward, meaning that there were few, or no, market reactions in the later months. The CAR for the insurance sector started at 0.001. This value is equivalent to 0.1%. It also exceeds the value of 0.466, which is equivalent to 46.6%. The graph shows that there were significant movements in CAR before and after the event. A holistic assessment of CAR throughout the analysis period shows significant movements in CAR. However, the most poignant information to capture in this analysis is the movements of CAR immediately when the event happened.
A focused analysis of this period reveals that there is no significant increase in CAR during this period. The values decreased from an average of 0.402 to 0.324. The values later decreased further to 0.303. The movements of these figures show that the mentioned event does not have significant effects on the financial sector. However, it is important to note that the CAR started increasing after three months. Based on these findings, we find that the event has the lowest effect on the insurance sector.
Discussion
Effects of Conflict on Different Economic Sectors
The findings of the event methodology showed that events have a significant impact on the performance of different economic sectors. This is why there were significant stock movement prices for the three sectors analyzed during the Arab Spring. Depending on the time of the event, the stock prices moved in varying degrees across the three sectors analyzed. These movements emerged as evidence that events affect stock price movements. This finding supports the views of previous researchers who have shown that conflicts affect financial markets.
However, the type of sector involved and the nature of the event determine the degree of influence that such conflicts would have on the markets. Nonetheless, out of the three sectors analyzed using the event methodology, we found the banking sector gave the most convincing facts to support the above assertion. Indeed, there were significant increments in the sector after and before the event studied.
An overview of the movements of the findings reveals that the sector grew, despite the political and economic uncertainty of the time. According to Bhavani (163), this is the best sector in the DFM that predicts investor perceptions of the market and that would provide us with a holistic understanding of the influence of conflict and political upheavals on financial markets in the Middle East. Owing to its resilience in the wake of uncertainty, it emerges as the best sector for investors to allocate their capital.
The investment sector had the second highest CAR in the analysis. Although there are variations in this assessment, the investment sector is among the most sensitive areas to analyze when a market is under threat of political and economic uncertainty. Nonetheless, because it followed the banking industry in showing resilience to these factors, it emerges as the second most desirable sector for investment in the DFM. However, one important point to note in this analysis is the lack of a dramatic reaction to the stocks when the event started, and even when it was ongoing.
One plausible reason that could explain this fact is the possible expectations of UAE citizens about political activities in the Middle East and the reaction of different countries to such events. Another explanation could be the possible understanding of the different social, economic, and political makeup of the UAE that made it difficult to generalize the same outcomes, as other regimes that collapsed under the pressure of the Arab Spring.
For example, the good international relations between the UAE and most western powers could have calmed the jitters of investors who may have been concerned about a possible conflict as that witnessed in Libya, between Gaddaffi and the international community. Up to 2015, the CAR for the three sectors analyzed has shown neutrality throughout the event (Arab Spring), which is still ongoing in some countries, such as Syria. Nonetheless, the findings obtained in this report have demonstrated the resilience of the banking sector in the wake of regional conflict in the Middle East.
The effects we have observed from stock price movements throughout conflict periods appear through research studies that have shown that financial markets around the world suffer from sudden shocks, which emanate from global conflicts. In other words, the UAE is not an exception to this rule because historically, studies have shown that the market has witnessed different shocks, such as the Pearl Harbor attack in 1941, which affected stock market performance in the US (Yousuf 1; Social Science Research Network 8). The September 11th attacks in 2001 and the Cuban missile crisis of the 1960s also had significant effects on the stock market performance of the US (Oxford Business Group 111; Social Science Research Network 8). In all these incidences, the markets suffered in the first few days of conflict, but later recouped after a couple of weeks.
The movements we have seen in the Dubai financial market also demonstrate that the Middle East region is not an exception to this pattern. Indeed, as the Social Science Research Network (9) observes, the Desert Storm conflict of 1991 affected the financial market performance of many Middle Eastern economies. The Iraq war of 2003 also led to the same outcome and more recently, the Syrian conflict of 2011 has similarly led to the same outcome (Yousuf 4).
Adverse events always negatively affect these financial markets, but recovery has also occurred soon after the immediate effects of the conflicts subsided. Therefore, based on this understanding, it is difficult to ignore the fact that conflicts would affect financial markets, albeit immediately when the conflicts start.
What about the Positive Effects of Conflict
Throughout this analysis, the major theme that permeated through chapters two and four were the negative effects of conflict on financial markets. Indeed, we encountered several literatures that showed the negative effects of global conflicts on financial markets. Some of the most notable conflicts that emerged in literatures included the World Wars, the Gulf war, the 2001-terror affront by the US, and, more recently, the Arab Spring and the political upheavals caused by the growth and spread of ISIS in the Middle East. Many researchers who have investigated the impact of these conflicts on financial markets have highlighted their negative effects on financial markets (Rubin 2; Social Science Research Network 4). Particularly, they have cited the destruction of infrastructure, loss of investor confidence, increased risk profiles and uncertainty as unique aspects of conflict that lead to these negative outcomes (Social Science Research Network 4).
Researchers who have investigated the impact of conflict in different parts of the world, including America and Asia, have highlighted the same results (Rubin 2; Social Science Research Network 4). Some of the respondents we interviewed, as experts, also confirmed the above assertions. For example, most of them mentioned uncertainty and the loss of investor confidence as unique aspects of conflict that affected the performance of the Dubai financial market. The findings of the event methodology also emphasized the same.
Although some literatures highlighted the potential positive effects of conflict on economies, it is important to point out that these effects were far between and confined only to sectors, or industries, that drive the “war machine.” In this regard, most of the effects of conflict on wars happened to have a negative effect on financial market performance. Based on these assertions, it is pertinent to point out that regional conflicts, generally, have a negative effect on financial markets.
This finding helps to answer our first research question, which strived to understand whether conflicts have a positive effect on the Dubai financial market. Using the insights gathered in this study, we find that conflicts do not have a positive effect on the Dubai financial market. We could not use the arguments provided by researchers who highlighted the positive effects of war on financial markets because their findings were mostly applicable to economies, or financial markets, that associated with the “war industry.”
The UAE is not such a country because it is not a militarized country. Furthermore, the Dubai financial market is not representative of this sector of the economy. Stated differently, the oil, energy, real estate, and tourism industries are the main contributors of the market’s success. Therefore, we cannot assume that the positive effects of war on military-based economies apply to the same market. This view highlights the opinions of some experts who highlighted the need for understanding the unique market characteristics of different countries that would probably moderate the impact of conflicts on financial markets.
This analysis is true because the stock exchange market of countries that are primarily involved in the manufacture of military hardware profit from conflicts because warring factions often buy such military hardware during conflicts. Russia and the US are some major military hardware producers who may benefit from such conflicts. The UAE is not one of them.
The findings section also brought our attention to the uniqueness of the Dubai financial market as a special characteristic of the market that increased its resilience in the midst of a tumulus Middle East region that is only recovering from the effects of the 2011 Arab Spring. The expert reviews exemplified these findings by demonstrating that Dubai has a positive reputation among investors. They also pointed out that some sectors of the financial market are not vulnerable to market volatilities brought about by conflicts in the region.
For example, they emphasized the resilience of the commodities market in the face of regional conflicts. They also highlighted the role played by speculators in mitigating some of the adverse effects of conflict in the market and emphasized the importance of using financial instruments of investment to hedge some of the risks posed by conflicts in the market. These issues highlight some of the factors that improved the resilience of the Dubai financial market during times of conflict.
That is why there were no studies showing that conflicts affect the Dubai financial market in the long-term. Indeed, the literatures we encountered appeared to present a gloomy picture of the financial market in the short-term (soon after the announcement of conflicts, or a few days after tensions about political disagreements rise).
In the long-term, the market chooses to correct itself, as investors understand the nature of conflict they are wading through and the possible timeline that such conflicts would take. Therefore, the uniqueness of the Dubai financial market in weathering the effects of uncertain market conditions emerged as a unique aspect of our analysis that required further investigation.
The Uniqueness of the UAE Market
The Middle East region has often suffered from perennial conflicts pitting nations against each other and countries against major foreign powers. Amid such conflicts and tensions, Dubai has developed a name for itself in the Middle East as a safe haven for investors who have continuously transferred their assets to the region through UAE registered companies, at the expense of other Middle Eastern countries, which are losing out through low foreign direct investments.
The general good performance of the Dubai stock exchange amid the conflicts that have plagued the Middle East highlights this fact. From this background, we observe that the UAE has weathered some of the negative effects of regional conflict on the Dubai financial market. We attribute this finding to the uniqueness of the Dubai financial market.
This line of reasoning also emerged from our secondary literature review findings, which pointed out to the resilience of the financial market in weathering the effects of ongoing regional instability issues. Therefore, while it may be true that regional conflicts would mostly have a negative effect on financial markets, the Dubai financial market appears to have a strong insulating attribute that protects its stocks from adverse market events brought about by regional conflicts (Social Science Research Network 7).
We have strived to explain these issues by investigating the unique dynamics of Dubai and the UAE in general and found out that not only does this region have a positive reputation among international investors in the Middle East; it also has strong market fundamentals that underlie its resilience in the wake of waging regional conflicts. The high number of foreign investor participation in the UAE financial sector highlights the positive reputation that the market enjoys in the Middle East (Social Science Research Network 7).
A careful analysis of this fact emerges from the findings of Fathy (1) who says Dubai, being an attractive investment destination in the Middle East attracts many foreign investors from around the world (more than any other financial market in the region). The high number of foreign investors trooping to the UAE to do business in the country is because the DFM offers lucrative and diverse investment opportunities for different types of investors (Fathy 1; Social Science Research Network 5).
In 2015, the total trading value of foreign investors jumped from 42% in 2014 to 47.7% (Fathy 1). The total value of foreign investments in the Dubai Financial market has reached AED 56 billion (Fathy 1). This figure is equivalent to 17% of market cap (Fathy 1). Owing to the high percentage of foreign investments in the Dubai financial market, experts say that this market remains a focal point for international investors who are willing to do business in the Middle East (Social Science Research Network 5).
Although the UAE’s good reputation among foreign investors has played an instrumental role in improving the resilience of the Dubai financial market in overcoming the market volatilities caused by a turbulent Middle East political environment, we cannot also ignore the role of international market developments in improving the resilience of the market to conflict.
Role of Market Sophistication
Unlike in the past, investors have become innovative and are now using sophisticated means of financial innovation to protect their investments from adverse market risks. The UAE is the same because investors use sophisticated trading instruments to cover their risks. Such instruments include (but are not limited to) hedging, derivatives, and terrorism insurance. All these instruments help to protect markets from the adverse effects of conflicts. They partly explain why the Dubai financial market has been resilient in a tumulus political environment of the Middle East.
Some of the experts sampled in this study alluded to this fact, but did not explain it in detail, perhaps because financial innovation is still ongoing and few researchers understand the effects of these developments on stock markets. However, this gap in literature does not take away the fact that market sophisticated could play an important role in increasing a market’s resilience to overcome adverse effects of conflict. The maintenance of investor confidence and the reduction of uncertainty are only some benefits that most investors enjoy from financial innovation in the global investment sector.
The Dubai financial market could be a leader in this regard because it is a model financial market in the Middle East and a pacesetter in the adoption of globally accepted financial and investment practices (Oxford Business Group 79). Based on these findings, it is easy to understand why the market leads many others in the Middle East in attracting foreign direct investments to the region. In other words, investors have increased options of indemnifying themselves when investing in a politically unstable region.
In other words, market sophistication has mostly influenced investor perceptions of conflict by improving their confidence in the market, even in the wake of adverse political or economic effects (Bhavani 163). The development of sophisticated financial tools, such as derivatives, hedging tools and future markets has given investors more options of managing their risks. This analysis provides answers to the second research question we sought to investigate in this study. It strived to understand the main drivers that influenced the relationship between regional conflicts and the Dubai financial market.
Using this line of questioning, we could deduce the fact that the sophistication of market instruments and the uniqueness of the Dubai financial market (compared to other Middle Eastern markets) are the main influences of the relationship between regional conflicts and the Dubai financial market. Other drivers that moderate the same relationship, and that other researchers have highlighted in this paper, include the strong market fundamentals of the UAE, strong political and governance structure of the UAE, the robustness of the economy, and the increased diversity of the UAE economy.
Market confidence that emerges because of market sophistication is a significant point of consideration in this analysis because investor confidence is one of the main drivers of market success at the Dubai financial market (Social Science Research Network 7; Bazoobandi 57-60). Another factor that could explain the uniqueness of the Dubai financial market is the economic policies pursued by the UAE government, which has reduced the market’s exposure to adverse market volatilities in specific economic segments.
This analysis is particularly important for our review because most regional conflicts in the Middle East region have affected the energy sector, which is a key investment driver in the region and an important contributor to regional GDP growth (Oxford Business Group 80). A deeper analysis of this issue appears below.
Diversification of the UAE Economy
The commitment of the UAE government to reduce the country’s economic dependence on the oil sector has emerged as a significant driving force for the resilience of the Dubai financial market in overcoming the effects of regional conflicts. The opposite (a heavy reliance on the oil sector) would make the market more vulnerable to oil price movements and crude oil price volatilities, brought about by conflicts, or otherwise.
Based on the low oil prices that hit the energy sector in 2016, financial markets in countries that mostly relied on the oil sector would have suffered significant losses. Although financial markets in the UAE are still dependent on the oil sector, they were able to resist the negative market pressures brought about by a poorly performing oil sector.
The shift from oil-reliance is a product of Dubai’s economic growth policy, which has mostly strived to diversify the economy from its reliance on oil (Chamut 1). This policy change started in the late 1990s, when foreign firms started trooping to the UAE to invest in different sectors of the country’s economy. Today, their investments are in different parts of the country’s economy, including real estate, the petroleum industry, and financial services (Chamut 1). Dubai’s economy is strategic to the growth of the UAE economy because it contributes 29% to the country’s GDP (Social Science Research Network 2-3).
It also holds the reputation of having the most vibrant and successful service sectors in the GCC region (Chamut 1). The country’s economic growth policy appears to be working because oil is not the main economic sector that contributes to the country’s GDP; instead, the real estate and construction sectors contribute the greatest percentage to the country’s GDP growth (Social Science Research Network 2-3).
Trade and export are also significant contributors to the country’s overall GDP. The financial service sector contributes 11% to the country’s overall GDP growth (Chamut 15). Other economic sectors contribute less than 10% of the country’s GDP. The retail sector leads this subsection of economic contribution by 9% (Social Science Research Network 2-3).
A recent assertion by Sultan Al Mansouri, the UAE Minister of Economy, reinforced the government’s unwavering commitment to increase the robustness of the UAE economy and decrease the dependence on the oil sector by reemphasizing the government’s commitment to reduce the contribution of the oil sector to the country’s GDP to 0% (Mayenkar 3).
The current contribution of the oil sector to the UAE economy is 30%. The government projects that this percentage would reach 20% by 2020 (Mayenkar 3-4). It further projects that the decline would slip to 0% in the next five decades (Mayenkar 3). The following statement could sum up a deeper evaluation of the strategic direction chosen by the UAE government to drive the country’s future economic performance. Relative to this assertion, the UAE Minister of Economy says,
“Our strategy at present is focused on building a knowledge based economy powered by various sectors such as industrial transport, space, renewable energy and information technology” (Mayenkar 3).
The decreased reliance on the oil sector to support UAE’s economy adds to the growing body of literature that is highlighting the uniqueness of the UAE financial market (Social Science Research Network 2-3). Indeed, as Chamut (1) points out, many economies in the GCC continue to rely on the energy sector for sustained economic performance.
Their stock market performances rely on the same industry. This situation explains why many countries in the GCC were hard hit by the recent slump in global oil prices, which slid by more than 60% (Mayenkar 7). Now, most of these countries are taking extreme measures to spruce up their public finance spending and maintain their infrastructure projects because oil revenues have plunged.
The UAE is a Stable Market
Most of the responses received from the interviewees showed that local and international investors in the UAE are not often spooked by the possibility of regional conflicts affecting their investments because the UAE enjoys a stronger legitimacy as a strong investment market (globally) than other Middle East countries. The professionals sampled in this paper shared this view.
However, the Oxford Business Group (80) says it is difficult to ignore the role of oil money in stabilizing the Dubai financial market, and the UAE at large because the ruling family has splurged lots of money in giving its citizens first-class infrastructural developments, including state-of-the-art hospitals, airports, roads and such amenities. It has also been able to build some of the best hospitals for its citizens and provide the majority of its subjects with the best education facilities. Free housing is also part of the benefits that come with the current regime.
The narrative that the UAE’s wealth is largely responsible for the peace and stability that has characterized the UAE has also been supported by researchers such as Bray (1) who say that the Arab nation has among the highest per capita incomes in the world. He also says the immense wealth held by the government ensures no citizen is denied his/her basic rights (Bray 1).
Nonetheless, some observers believe that the UAE government has directly played a role in curtailing the political freedoms of its people by silencing dissenting voices. For example, the Oxford Business Group (111) has cited cases where the government has blocked liberal websites, such as UAE Hewar, which demanded the abolishment of a constitutional monarch for a more direct democracy, which is mostly people-driven, as opposed to monarchical driven.
Other researchers also draw our attention to the government’s hand in dissolving the Boards of the Jurists’ Association and the Teachers’ Association because they also wanted political reform in the country (Social Science Research Network 8). People who hold this opinion believe that the government has used its immense wealth as a tool to bribe the Emiratis into keeping quiet about asking for political, economic, or social reforms by giving them irresistible social welfare perks (Oxford Business Group 111).
These insights affirm the views of some respondents who said that the UAE has a unique type of democracy that works well for its people. Yousuf (3) supports this view by saying the rulers of the UAE are close to the citizens and listen to what they have to say through Majlis that often happen two days of the week. There, citizens can petition the government on different issues. Therefore, the citizens have not been motivated to participate in political and social conflicts that have plagued its neighbors.
The Fundamentals of Dubai Financial market are Strong
Although the findings of the event methodology showed that the Dubai Financial market has suffered under fears of conflict, the strong market fundamentals underpinning the market have made it resilient. In fact, as some observers argue, most of the stocks trading in the Dubai financial market are undervalued (Yousuf 1; Social Science Research Network 8). The use of the event study methodology has helped us to have a proper contextual understanding of the above findings because our review revealed how many studies have highlighted the relationship between conflict and economic performance.
Particularly, these studies have demonstrated their competency in explaining not only economy-wide events, but also firm-specific ones. This method helps to support the validity and reliability of the findings we have derived from this paper. For example, as Bhavani (163) observes, event studies are useful in several economic areas that we have focused on. For example, researchers have used it in the past to analyze stock market fluctuations after earnings announcements. Researchers have used the same methodology to predict the effects of legal changes in law and economic activities (Bhavani 163). Generally, researchers affirm the findings of this study by demonstrating the effects of conflict on stock market performance.
This is why Yousuf says, “Major world events impact on stock market price” (4). However, different stock markets have unique reactions to these major world events, based on the market fundamental and history of their associated countries. The UAE has strong market fundamentals that have underpinned its growth for the past few years. Positive and neutral events had the greatest effect on stock market performance in the UAE. Negative economic events also led to the same outcome.
Comprehensively, an important point to consider in this analysis is the realization that, most investors tend to overreact to global political events. Experimental psychology has also explained this fact by saying that most people would overreact to new information (Social Science Research Network 2-3). Bhavani (163) also supports this view.
Vulnerabilities of the Dubai Financial Market
In the past, specific financial crises have affected the Dubai financial market and exposed some of its vulnerabilities to conflict and other adverse market events. For example, according to Alsharairi (750-751), the Dubai financial market is vulnerable to the volatility of the dollar (most GCC countries depend on the dollar for their international business ventures), and liquidity squeezes because of the poor performance of the real estate and housing market. This effect emerged after the 2008 global economic crisis.
The lack of transparency in governance structures and the inconsistencies in trade policies also amplify the market’s vulnerabilities to market volatilities (Yousuf 1; Social Science Research Network 8). Nonetheless, as recent studies have alluded to, changes in the UAE’s monetary and fiscal policies have effectively minimized some of these vulnerabilities (Social Science Research Network 8).
Others have disappeared because of improvements in corporate governance policies that continue to improve transparency in the management of companies. The establishment of several regulatory frameworks highlights this progress. This is why Yousuf (1) says that today, Dubai is booming with increased market activity, which observers have affirmed through the increased participation of foreign investors in the market.
Conclusion and Recommendations
At the onset of this study, the researcher set out to answer three questions about the effects of regional conflicts on the Dubai financial market. The first question sought to find out if regional conflicts have a positive effect on the financial market. The second question strived to find out the major drivers of these conflicts on the financial market, while the last question was aimed at investigating if regional conflicts have the same effect on different segments of the financial market.
Based on a review of the expert opinions about the research issue, we found out that regional conflicts do not have a positive effect on the Dubai financial market. However, this finding does not mean that the opposite is true. Stated differently, the findings of this study do not imply that regional conflicts have a negative effect on the Dubai financial market. Therefore, we deduce the fact that the Dubai financial market has a strong insulation from the effects of regional conflicts.
In the fifth chapter of this report, we explored several reasons that could explain the resilience of the market in overcoming the negative effects of political instability in the region. Some of the reasons we mentioned include the increased diversification of the UAE economy (mostly from the energy sector to non-oil sectors), increased market sophistication and financial innovation, strong market fundamentals of the UAE, positive investor perceptions of the UAE and the continued stability of the UAE in the middle of a turbulent and unstable region.
This analysis highlights the important role that politics plays in improving a country’s financial markets and, by extension, its economy. Most of the issues highlighted in this paper explain the role of the UAE government in maintaining the country’s image as the model investment location for investors (locally, regionally, and internationally). This review brings our attention to the intersection of politics and investor relations.
The findings of this study have revealed that having a good perception, or image, of a country, or market, could significantly diminish traditional concerns about financial market volatilities created by conflicts, or other adverse political events. The same findings have also shown that the governance structure of a country is not always a strong determinant of economic performance because some western countries have developed resilient markets with a strong democratic governance structure in place, while the UAE has achieved the same goal with a different type of governance structure.
Based on these insights, implicitly, we could assume that, at best, regional conflicts have a neutral effect on the Dubai financial market; at worst, it has a mixed effect on the financial market. However, the general understanding of conflict and its effect on financial markets is that it leads to the suppression of economic growth, loss of financial reserves and the weakening of the financial system.
However, a contextual assessment of the effects of conflict on the Dubai financial market reveals that this market is unique because it has strong economic fundamentals and a stable political, economic, and social system that calms down the jitters of investors whenever conflicts arise. In this regard, the infamous conception of Dubai as a “safe haven” for investors stands true.
Based on the insights provided in this review, undeniably, the Dubai financial market plays a key role in helping us to understand the economic health of the UAE and the larger Middle East region. Its significance to the economic growth of the region also helps us to understand investor perceptions about the market and their outlook on different securities in the sector.
Understanding how different external factors affect the market’s performance is a positive step towards comprehending how to increase market efficiency in the wake of growing global complexities in the business space. These insights set the stage for understanding the significance of this paper. However, for purposes of improving our understanding of the relationship between conflicts and financial market performance, it is pertinent to review the following recommendations for future research.
Recommendations
The role of market sophistication in lessening the impact of conflicts on the financial market has emerged as an interesting finding for moderating the relationship between conflicts and the Dubai financial market. Researchers need to do more research in this area of study to understand the extent that financial innovation has improved investor confidence. The same research should also investigate the effects of these tools on the risk appetite of investors. A key fact to consider in this analysis is the evolving nature of financial risk management instruments in today’s globalized world because markets are becoming more intertwined and complex.
Therefore, it is no longer acceptable to adopt a narrow understanding of financial market performance because many factors affect how investors and stock markets respond to adverse market events. Providing a contextual analysis of the research phenomenon was a primary goal for the researcher when analyzing the effects of conflicts on the Dubai financial market. This is because the UAE has unique social, political, and economic dynamics that moderate this relationship.
This understanding brings us to our second recommendation, which is to provide more context-specific research studies that explain the effects of conflicts on financial markets. For example, researchers could investigate the same research issue on the Saudi Arabian financial market and find out if there are areas of divergence, or convergence, that require further research. This effort would address some of the accuracy and reliability issues we highlighted in our problem statement because we found out that many studies did not provide an accurate review of the relationship between conflicts and financial markets.
Instead, they provided general reviews of the same, thereby ignoring the smaller political, social, or economic factors that would influence the same relationship. Future research should also expand the scope of respondents for expert review. This was a limitation of this study because we only explored the views of respondents from specific job titles, including credit managers, portfolio managers, investment managers, and economists.
Researchers should expand this pool of respondents to find out if we could come up with different findings from the ones mentioned in this report. The findings of the proposed analyses would help us to understand the impact of diverse economic policies on financial market performance and the overall growth of a country’s economy.
Nonetheless, using the information we derive from this paper, investors would be in a better position of making wise business decisions about their Middle East ventures. This benefit arises from the fact that the Dubai financial market is an important investment driver for local and international companies to raise capital for their operations. Since the UAE has a model economic framework for the Middle East economy, the findings of this study would also be useful in understanding the economic growth and direction that Middle East economies are following in today’s globalized market.
Similarly, the findings of this study would be instrumental in understanding the measure of risk and market volatilities in the financial market (a measure that investors and portfolio managers often seek when making investment decisions about different kinds of securities and when advising their clients about the best business decisions to make). Lastly, the findings of this study would be useful in adding to the growing body of literature surrounding the impact of conflicts on capital markets and the wider financial sector.
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