Many UAE and Qatar stocks in ‘overpriced territory’ as they join MSCI index

Emerging market stocks guru Mark Mobius says UAE stocks look frothy on the eve of their entry into MSCI Emerging Market Index.

As the UAE and Qatar join the MSCI Emerging Market Index on Sunday, a developing world stock guru is warning that many of their equities have gone into “overpriced territory”.

That is after a spectacular run for the Arabian Gulf states’ stock benchmark indexes in the past year and a half.

While Mark Mobius, who manages US$50 billion in emerging market stocks at the fund manager Franklin Templeton, continues to see potential in the UAE and Qatar in the long run as the countries’ economies recover, he sees better buying opportunities at the moment elsewhere including Russia and Thailand, where recent political upheavals have battered stock prices.

“There is still value to be had in both the United Arab Emirates and Qatar over the long term,” Mr Mobius said. “Of course, many of the stocks have gone into overpriced territory but there are some that are reasonably priced, given their strong growth prospects.

“The best opportunities are in those markets where the news is the worst and, of course, Russia ranks high on that list. Also Thailand, although not coming down very much, still has many good investment opportunities. In the Middle East region, Saudi Arabia is of particular interest for us.”

There are other fund managers, however, who remain bullish on the UAE and Qatar despite the recent surges and still find several sectors attractive.

Emerging market stocks were given a boost in the aftermath of the financial crisis in 2008 when the US Federal Reserve and other central banks around the world started to provide monetary stimulus to pump up economic growth while keeping interest rates low. But when the Fed signalled last year it would start tapering that cheap money, a huge sell-off was sparked in emerging market assets. That divestment, which caused the MSCI Emerging Market Index to drop 5 per cent last year, was also worsened by economic weakness and political instability in countries such as Turkey and Russia.

By contrast, stocks in the UAE and Qatar have rallied during the same period, boosted by the announcement last June that they would join the index – which has more than 800 listed companies in 21 markets across the developing world – as well as improving economic indicators.

Dubai’s index alone more than doubled in 2013 and has gained 51 per cent this year, making it 2014’s best global equity performer so far. Meanwhile, Abu Dhabi’s stock index advanced 22 per cent and the Doha measure 33 per cent, making the latter the world’s second-best performer.

“Despite the pricing in of the ‘MSCI effect’, we remain positive on the outlook for growth in these markets,” said Cesar Perez, the London-based chief investment strategist for Europe, Middle East and Africa at JPMorgan Private Bank. “The banking sector remains strong, largely driven by the favourable operating environment and lending growth in both countries,” he said.

“Generally, we consider the heavy reliance on the large oil and gas sectors a perennial risk factor for the region, exposing the markets to a sudden and persistent drop in oil and gas prices. We do not believe this risk is prominent in the short term.”

The UAE’s economic growth exceeded 4 per cent last year amid government spending on infrastructure and a rebound in trade and tourism. Shrinking interest rates have also helped businesses to expand and individuals to seek leverage for property and big-ticket items. The credit bonanza, which has bolstered the bottom lines of banks, has been a concern for some analysts, however.

John Lomax, the head of global emerging market equity strategy at HSBC in London, said that while he recognises qualities such as pegged currencies and a recovery in corporate earnings that distinguish Gulf countries from other emerging markets, he maintains a “neutral” rating on the UAE. This is because of concern that the country’s low interest-rate fuelled economy may overheat amid rapid appreciation in property and listed companies.

Follow us on Twitter @Ind_Insights