Why UAE stock market investors will love US interest rate cut - and with more to follow

Bal Krishen, Gulf News, September 20, 2024

Dubai: UAE consumers and businesses have much to be pleased about from Wednesday's US Fed’s 0.5 per cent interest rate cut. They won’t be the only ones, as investors in listed companies on DFM, ADX and other GCC stock markets hope to cash in on the rate cut bounce.
Specifically, stock market investors will be looking at how the rate cuts show up on companies’ fi nance costs, which had

Plus, these companies also had to start making provisions for corporate tax.
With the first-rate cut happening, they will have some flexibility on the cost side. And that’s a plus for their stakeholders, eyeing better profits - and dividends - from the companies they have exposures in.
Investors on the DFM drove the general index higher by 0.71 per cent (31.32 points up Thursday (September 19), while on ADX, the gain was 0.82 per cent (68 points higher).

“For UAE’s listed companies, higher finance costs and corporate tax have been the two macro forces that rippled through balance sheets for the better part of this year,” said Sameer Lakhani, Managing Director at Global Capital Partners. “Now, after the rate cut, lower borrowing costs will have some positive impact - provided the markets believe that inflation has been truly contained.”
Other market watchers agree that the rate cuts are positive for UAE-listed companies. "You have the higher finance costs dragging down profitability for some major companies," said an analyst. Now, the 9 percent corporate tax is something they will have to live with—but if their cost of operations drops from a lower interest rate regime, that's a massive plus." That means the prospect for UAE companies to see better profitability and, by extension, a chance for shareholders to get a share of higher dividends.

When should UAE businesses get started on refinancing?

OK, the first rate cut of the new cycle has happened, which is itself a big positive for businesses forecasting their term costs. For many businesses, this is also the time to start thinking about whether to refinance their existing loans or keep them as they are.
The likely scenario would be for CFOs to push for possible refi nancing opportunities further down the road, when the USFed can provide a clearer picture of what they plan to do on more rate cuts.

“Rates expected to drop to 4.4% by the end of this year,” said Bal Krishen Chairman and CEO of Dubai-based Century Financial. “While lower rates will ultimately help businesses to refinance their debt at cheaper rates, this process typicallytakes 6-12 months to see meaningful eff ects in the economy.

“Retail customers in the UAE can expect to benefit from the reduced rates through lower mortgage and personal loan rates.”

A rough window for strategic refinancing might be within 12 to 18 months after rate cuts begin. However, this is not a strict rule, and businesses must assess their own capital needs and the broader market situation, particularly considering the influence of US Federal Reserve policies on the UAE market due to the dirham's peg to the dollar."

Source

Gulf News