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UAE bourses set for a fresh start

UAE equities offer new opportunities to investors as recent market correction brings down valuations of a number of well managed companies to attractive levels, writes Muzaffar Rizvi

The UAE bourses are set to make a fresh start this year after experiencing a rollercoaster ride in 2014 due to volatile global economy, international developments and a plunge in oil prices.

Analysts and market experts see new opportunities for investors to enter the market at current attractive valuations offering one of the best returns in the region due to positive indicators of the country and less dependence on oil revenues. They say the recent market correction brought down valuations of a number of well managed companies to attractive levels and highlights good prospects in 2015.

They further say the UAE equities have yet to realise the true potential of Emerging Market status and banking and real estate sectors will continue to dominate trading in the new year and attract regional and international investors. The encouraging fundamentals of blue chip scrips and high liquidity are expected to drive markets higher over the next 12 months, they added.

Nadi Bargouti, Managing Director of Asset Management at Emirates Investment Bank, said the UAE equity markets are currently trading at a trailing 12 times earnings and 1.4 times book with a dividend yield of 2.9 per cent, which makes them two of the most attractive markets in the world.

“We expect blue chip companies with healthy balance sheets to continue their top and bottom line growth at normalised levels in 2015 supported by robust economic growth across several sectors, especially non-oil sectors. New IPOs will certainly add more depth to the market and attract new capital from both regional and foreign investors. Low oil prices, if persistent, and geopolitical tensions will act as headwinds and add to market volatility,” Bargouti told Khaleej Times.

The Dubai Financial Market’s General Index and the Abu Dhabi Securities Exchange managed to close 2014 in positive column with 11.94 per cent and 5.56 per cent gains, respectively. Massive plunge in oil prices weighed on markets in the fourth quarter as Dubai and Abu Dhabi bourses fell 23 per cent and 11.2 per cent, respectively, during the quarter.

Despite volatile trading, especially in second half of 2014, combined market capitalisations of Dubai and Abu Dhabi markets rose by 21.41 per cent and reached at $223.18 billion from $183.82 billion in 2013.

Market capitalisation in Dubai Financial Market climbed 27.48 per cent to $89.11 billion by December 24, 2014 compared to $69.90 billion in 2013. In Abu Dhabi, market capitalisation surged 17.68 per cent to $134.07 billion as against $113.92 billion in corresponding period of 2013.

Shailesh Dash, chief executive of Al Masah Capital Management, said the UAE stock markets had quite a wild ride in 2014 as the price trend changed four times during the year. Investors suffered major bouts of volatility in 2014, with the first four months showing strong gains and the last eight months giving it almost all back.

“The Dubai Financial Market General Index began the year at roughly 3,400 points and for the next four months it powered almost consistently higher, increasing by some 60 per cent to 5,406.62 points on May 14. Investors bid up prices in anticipation of the official list of stocks making it onto the MSCI Emerging Markets Index as well as bullish sentiment throughout the economy.

“From early May the market began to show weakness with mention from Central Bank of the UAE that property prices were becoming stretched. From that point until the end of June the market corrected by nearly 30 per cent from 5,400 points to just below the 4,000 level,” he said.

After recovering some of their gains from July to September, he said oil prices then began to decline at an increasingly quicker pace dragging down the UAE markets and all GCC markets together with investors fearing lower oil prices would affect government budgets and translate into spending cuts and weaker economic growth.

“With Brent crude falling consistently from a height of $110 per barrel in late June to $60 a barrel in mid-December, the UAE stocks at one point in mid-December had lost all of their gains for the year and on average were lower by 10 percentage points from the start of 2014. The Abu Dhabi Stock Exchange Index followed the same path as that of Dubai but was, as it typically is, more muted in the magnitude of its moves,” he said.

“Although there will be pockets of opportunity to buy good companies at discounted prices, stocks in general entering 2015 will continue in their recent volatile nature,” Dash told Khaleej Times.
He said oil remains below regional budget breakeven levels and spending and if this not drastically effected the performance, market could feel somewhat of a pinch during the year especially if excess supply in the oil markets remain for a time.

Evaluating the performance of equities in 2014, Bargouti said markets experienced a turbulent ride last year after enjoying a smooth sailing in 2013. He said markets’ positive catalysts including the upgrade to emerging market status, improved corporate profitability and a healthy pipeline of IPO listings helped revive investor sentiment and pushed the nation’s indices up to pre-crisis levels.

“Strong performance was supported by a significant increase in liquidity, in which we saw trading volumes double the levels reported in 2013. However, investor euphoria was initially dampened mid-year by the Arabtec saga and the Russia-Ukraine crisis and most recently by the plunge in oil prices that erased almost 40 per cent of the DFM market value in two months.”

He said attractive valuations combined with improved future corporate earning visibility attracted bargain hunters with significant liquidity back to the oversold markets which regained more than 50 per cent of the losses suffered.

Zachary Cefaratti, Risk Officer at Dalma Capital Management Limited – a DIFC Hedge Fund Manager, said the DFM General Index rose from 3369.81 on December 31, 2013 to a peak of 5,406.62 points in May 2014 and closed at 3774.00 points on December 31, 2014. The Abu Dhabi market showed a similar trend with the index rising from 4,290.30 on December 31, 2013 to a peak of 5,253.41 in May 2014 and closing at 4,528.93 points on December 31, 2014.

“For long-term investors, the Dubai index posted a return of 10.4 per cent in 2014 while Abu Dhabi witnessed just over four per cent. Compared to other emerging markets in the Middle East, the UAE’s performance has remained weak with Qatar and Egypt recording returns of 17.4 per cent and 28.4 per cent, respectively. Comparable markets in Asia such as Thailand and Indonesia have also witnessed returns in the range of 18 per cent to 20 per cent,” Cefaratti told Khaleej Times.

“While Price to Earnings (P/E) multiples of 11.2 for Dubai and 12.3 for Abu Dhabi may seem attractive compared to P/E of 15x+ for countries mentioned above, valuations remain rich when examining Price/Earnings to Growth (PEG) ratios 1.08 and 2.92 for Dubai and Abu Dhabi, respectively, versus 0.91, 0.95 and 0.99 for Qatar, Thailand and Indonesia, respectively.”

Cefaratti said the UAE valuations seem attractive at current levels after having wiped out May 2014 gains. “Specifically for Dubai, the PEG ratio is very similar to that of comparable emerging markets and, thus, indicates a fairly valued market relative to its peers,” he said.

Dominating sectors

After a rollercoaster ride in 2014, Dash said investors will likely want their capital to be invested into less volatile securities and stocks.

“Investors should seek out blue chip companies in the sectors of the economy that are in the best financial shape such as well capitalised banks that have good stable dividend yields. The services sector of the economy should continue to do well in the UAE especially tourism, as the developed oil importing countries have had their disposable incomes increase indirectly from the more than 40 per cent decline in oil prices which will also make it cheaper for them to travel and spend abroad,” he said.

Bargouti said banking and real estate sectors are likely to continue dominate trading this year.
“Given the nature of the UAE markets and their significant weight in their respective indices, banking and real estate sectors have historically dominated trading volumes and we expect that trend to continue in 2015,” he said.

He said banks in the UAE are very well capitalised, enjoy healthy margins, trade at attractive valuations relative to their peers and will benefit from an expected interest rate increase in 2015.

“The real estate sector will continue to attract capital as companies report improved earnings on the back of increased unit deliveries. Planned IPOs and announced spinoffs will add market depth and increase liquidity,” he said.

Emerging markets’ benefits

Dash said the UAE markets have made a successful entry into the Emerging Market Index and its true potential will be realised over a period of time.

“In May 2014, the UAE became part of the MSCI Emerging Markets Index which is a long-term positive for the country. Over time it will continue to attract emerging market institutional investors that were unable to invest here before. This will, over the long term, broaden our markets and increase liquidity and the ability for companies to raise equity and debt capital once this oil situation is fully sorted out and prices stabilise,” he said.

Cefaratti said total market capitalisation of MSCI Emerging Market is $3,991.5 billion versus $106.4 billion for MSCI FM as of October 31, 2014. Further, as of June 2014, $1.4 trillion of funds are benchmarked to MSCI Emerging Markets Index – $243 billion by passive funds and rest by active.

“The significantly large size of the investable market as well as a greater following by fund managers supports stronger liquidity for Emerging Market constituent stocks from UAE in 2015,” he added.
Bargouti said the UAE markets attracted foreign investors following the MSCI upgrade in May last year.

“We’ve already seen an increased foreign investor participation in local markets since the announcement and inclusion in the MSCI emerging markets indices. Net foreign positions were up 75 per cent in Dubai and 100 per cent in Abu Dhabi this year compared to last year.

“Additionally, foreign investors represented 15 per cent of total trading volume in 2014 in Dubai versus 14 per cent in 2013, whereas in Abu Dhabi foreign participation increased from 14 per cent in 2013 to 20 per cent this year. This participation will gradually increase as the markets add more depth and liquidity through new IPOs, and corporates apply transparent corporate governance policies that parallel global standards. Equally crucial is the regulator’s active oversight to ensure proper disclosure and sharing of information,” he said.

Sachin Mohindra, portfolio manager at Invest AD, said the MSCI upgrade has clearly put both the UAE and Qatar on the radar screen of a number of large actively managed emerging market funds.

“We expect a gradual but decisive increase in interest from these investors in our markets. Whether or not this interest translates into investment flows in the short term would depend on absolute and relative valuations in 2015,” he said.

“The recent correction has brought valuations in line with other emerging markets, and certain companies look much more attractive compared to three months ago,” Mohindra said.

About trends to encourage more companies to IPO in 2015, he said liquidity trends and investor sentiment are key determinants of the IPO pipeline. Other factors that will influence the IPOs are the growth plans of private businesses in the GCC and their financing needs.

“Regulators across the region have initiated measures to encourage privately owned businesses to consider listings. We believe that a number of these companies are evaluating an IPO. However, the actual timing will depend on prevailing valuation, liquidity and sentiment trends in 2015,” Mohindra concluded.