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UAE shares to continue overperformance vs EM
As the equity markets have roared in the New Year, we think some signs of exhaustion in the current rally may emerge in late January.
The Dubai stock market currently trades at 12 times prospective 2014 earnings, which is cheap by emerging market standards. — KT file photo
The US Federal Reserve Bank could taper its quantitative easing programme further. Also, the US government debt ceiling has to be raised by end-January and this could lead to some friction in the US Congress. And emerging markets (with the exception of GCC areas) are still under-performing the developed world, as long-term USD interest rates rise.
We feel the Dubai market could use such external events as an excuse to take profits in late January. Hence we would adopt a defensive tone in our portfolios and look to taking partial profits on over-heated sectors like real estate and financials. Defensive sectors would be utilities and telcos.
The Dubai stock market is not terribly over-stretched. It currently trades at 12 times prospective 2014 earnings, which is cheap by emerging market standards. And earnings growth for 2014 is estimated at 13-15 per cent, which means the market should rise further by at least this amount in 2014.
Thus, while we are cautious about the markets in the immediate month ahead, we prefer to stay invested in defensive sectors and pick up broader exposure in any correction. By April 2014, we expect another leg up in the GCC equity markets ahead of the formal inclusion of the UAE and Qatar stock markets into the MSCI emerging market indices.
We do not anticipate any market crashes in 2014. This is because major central banks and the IMF are still vigilant about deflationary threats to the global economy, and will likely extend a lifeline to markets if any sign of a precipitate decline in market indices is in the offing.
The US economic recovery is well underway. US growth accelerated in Q4 2013 and most recent data releases show more of the same. For example, the Empire Manufacturing Survey, a local measure of industrial activity, came in way above expectations, sending US bond yields, the dollar and equities higher.
The writer is the chief investment officer at Emirates NBD. Views expressed by the author are his own and do not reflect the newspaper’s policy.
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