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'Investors in UAE should turn to value investing'

BY BABU DAS AUGUSTINE / 5 January 2005

DUBAI - The booming share prices have resulted in high valuations of UAE stocks with some shares trading far above their fair values, which calls for selective stock picking, said Iyad Duwaji, CEO of Shuaa Capital.

“The UAE market is not cheap anymore. With P/Es of several stocks exceeding 35, it is time investors took professional help in identifying stocks which have higher intrinsic value and growth potential,” Duwaji said.

Evaluating the performance of the Arab markets, Senior Shuaa executives said the Arab region experienced a big boom in 2004 with the Arab Composite Index gaining 64.4 per cent, while the Morgan Stanley Capital International (MSCI) Emerging Market Index grew just 24.3 per cent and Dow Jones Industrial Average was up by a mere 3.4 per cent.

In terms of market performance, the UAE emerged second in the region with 103 per cent growth behind Egypt — which grew by 112.5 per cent — followed by Saudi Arabia at 82.9 per cent and Jordan at 66.1 per cent.

Based on the annualised corporate earnings, the stock valuations were the second highest in the UAE with a market P/E of 22.9 per cent, while the Saudi market has the second highest market P/E of 24.4.

On the macro economic front, the GCC countries are expected to grow more than 5 per cent next year with inflation rate picking momentum. “Lower-mid income groups and salaried consumers will view rising inflation as a serious threat. This needs to be quickly solved to maintain market stability,” said Ahmed Al Samerai, economic advisor to Shuaa Capital.

Backed by strong economic fundamentals such as strong oil prices, relatively low local interest rates, high liquidity chasing dividend yields and the corporate earnings growth in excess of 50 per cent, the UAE market is expected to deliver strong performance in the first quarter of 2005. However, the market is expected to experience a mild correction in the second quarter, bringing the share prices to more realistic levels.

“The abundance of liquidity has resulted in some shares overshooting their realistic levels. However, many of these stocks are fundamentally strong, thus a correction cannot shave of the entire value as it happened in 1997 in Oman and in the UAE in 1998,” said Hissam Arabi, senior vice-president, Shuaa Capital.

The growth is expected to be stronger in Oman, Kuwait and Egypt where the market P/Es are 10, 12.6, and 1.9 respectively. In the mid-year correction, Shuaa expects only the speculative stocks to get hit, while it sees construction, real estate, cement, building materials, telecom and banking shares will continue to report strong growth during 2005. “For some stocks, the prices could be higher than the fair value because of the high demand induced by high liquidity. On the supply side, the market should bring in more IPOs to absorb the excess liquidity,” said Duwaji.

Calling on the authorities to make primary market issues easier he said, the listing of more companies with good track record will increase the depth of the market and reduce the impact of liquidity overhang while making the market less susceptible to unrealistic price movements.

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