A recent wave of high-profile IPOs, excessively low valuations, and favorable regulatory measures have dramatically increased the attractiveness of equities on UAE stock exchanges.
Despite the global economy rallying toward the latest phase of the credit cycle, the least risk-averse investors have so far insisted in crowding the public markets as they seek to pull the most out of a record-breaking performance of US equities. On the other hand, those who have no intention to grapple with the implications of a potential global trade war, will keep relying on an ever-competitive private equity industry, which as of January 2018 counted a record 2,296 funds and a 26% increase compared to January 2017, seeking an aggregate of USD744 billion in capital.
So why should investors even bother to keep the UAE capital market offerings on their radar? After all, 2018 has not been the best performing for UAE bourses, especially Dubai where the stock index has tumbled 13.7%. They have been hurt by slumping real estate prices and an outflow of funds to Saudi Arabia, where investors are eagerly anticipating Riyadh’s entry into emerging market indexes next year.
Nonetheless, regional fund managers have turned very positive on equities in the UAE and have reasons to be more bullish on the market, according to Reuters. The first reason is the longer-term implications of the license agreement that Nasdaq Dubai signed in late 2017 with index provider MSCI to create derivative products that will be traded on the former’s derivatives platform. The exchange initially plans to develop futures contracts based on the MSCI UAE Index, which is widely tracked by international institutional investors.
Secondly, the number and degree of players that have made the floating of their shares a proper strategic target within their corporate strategy. The forerunner, in this sense, was ADNOC Distribution, which not only raised USD851 million listing its shares on the Abu Dhabi Securities Exchange (ADX) last December 2017, but also approved a AED735-million dividend payment at the company’s first annual general meeting.
Looking ahead, Emirates Global Aluminium is likely to be the star with an expected IPO size of USD3 billion, and Abu Dhabi Ports is targeting around USD1 billion. Meanwhile, GEMS Education plans to raise USD1.5 billion through a London IPO. What does this mean for the UAE’s financial sector? According to Rashed A. Al Blooshi, CEO of ADX, “It means growth and expansion; it means potential for them to be significantly larger and more active. From a government standpoint, it means distribution of wealth.”
Abu Dhabi now counts 966,000 investors, with 40% of them foreign; it also counts almost 7,800 institutional investors and more than 350 pension funds from all over the world. All of the top-25 assets under management are available and being traded. 54% of managers now expect to raise their allocations to UAE equities in the next three months, and none plan to reduce allocations, the most positive balance since January 2017, when 31% expected to raise UAE allocations and 31% expected to reduce them. Managers cited two major reasons for the shift.
The first one is valuations. Dubai’s poor performance has left stocks trading at less than eight times trailing earnings, compared to about 14 times for MSCI’s emerging market index. “The underperformance of the UAE market and the undifferentiated sell-off across all stocks, irrespective of long-term fundamentals, has resulted in attractive valuations for some well-managed companies,” said Sachin Mohindra at Invest AD. The second factor is the government announcement that it will permit 100% foreign ownership of some UAE-based firms, up from the current 49% limit, and grant long-term residency visas of up to 10 years to foreign investors and some professionals.
Overall, it is an excellent point in time to invest in Abu Dhabi and UAE equities in general. ADNOC Distribution’s listing was not only successful, but also well-managed and important for the diversity it added to the financial platform of the Emirate. It set the scene for other transactions in the near future.