With developer Damac preparing a Dubai listing and a massive IPO by Emaar’s retail unit which operates the Dubai Mall expected – the fourth quarter of this year is shaping up to be a busy period for local markets.
However, bearish sentiment is building as investors raise concerns over the high valuations currently offered by UAE equities.
Fund managers are planning to reduce their exposure to UAE markets according to the latest Reuters survey of 15 leading investment managers including at Abu Dhabi Fund for Development, Emirates NBD, National Bank of Abu Dhabi, NBK Capital and Schroders Middle East, conducted over the past 10 days.
Only 7 per cent intend to increase equity allocations there and 47 per cent intend to decrease them, compared to ratios of 27 per cent and 33 per cent a month ago.
The ratio of managers who are bullish towards the UAE is the lowest since the survey was launched last September; the ratio of bearish managers is the highest.
One reason is valuations, which surged during a bull run last year and early this year. Dubai is now trading at about 14 times projected corporate earnings for this year, well above roughly 10.5 times for the MSCI Emerging Markets Index.
Another factor hurting perceptions of the UAE is regulatory standards.
Many fund managers felt UAE regulators should have been more proactive in ensuring information disclosure at Dubai builder Arabtec, whose shares plunged in May and June, dragging down the entire market, because of rumours about its relations with big shareholder Aabar Investments. The outlook for local markets had been robust before the sell-off triggered by Arabtec with a number of companies planning listings including Emaar Malls and a first ever greenfield IPO by Marka.
However, Middle East funds are now turning towards Saudi Arabian stocks after news the market will open to direct foreign investment.
“The opening of the Saudi market is definitely a huge positive and should attract a lot of active money,” said Naveed Ahmed, senior portfolio manager at Securities and Investment Co of Bahrain.
“The index has breached the psychological barrier of 10,000 points and can extend gains over the next few weeks and months. The medium- to long-term prospects for the Saudi market look very good.”
Saudi Arabia is also at about 14 times projected earnings, but managers appear much more willing to tolerate such a high multiple in the Saudi case because of that market’s greater liquidity and diversity compared to the UAE.
Saudi Arabia also enjoys a better reputation than other major Gulf markets among fund managers for its enforcement of rules on corporate disclosure and improper share trading.
The Reuters survey showed two-thirds expected to raise their equity allocations to Saudi Arabia in the next three months, up from 40 per cent in the last survey a month ago. The ratio of bullish managers was the highest since September 2013.
The Saudi market regulator announced last week that it planned to open the bourse, the Arab world’s biggest with a capitalisation of about $550 billion, to direct investment by foreign institutions in the first half of next year. Currently, foreigners can only invest through swaps and exchange-trade funds.
To avoid destabilising the market, the regulator is expected to grant investment licences only gradually, so a sudden flood of foreign money is unlikely. Saudi Arabia may not be included in a major MSCI equity index before 2017 at the earliest.
But many fund managers think the market-opening could be a game-changer for foreign investors in the Gulf, offering them unprecedented liquidity and diversity.
“With an extensive representation of sectors, the Saudi stock exchange trades about $2 billion per day, which is significantly larger than any other single Gulf Cooperation Council market,” said Yong Wei Lee, the head of regional equities at Dubai’s Emirates NBD.
Bader Ghanim Al Ghanim, the head of GCC asset management at Kuwait’s Global Investment House, said not only the market-opening plan but strong second-quarter earnings announcements from Saudi companies made the market attractive at present.
A range of companies including Saudi Arabian Mining Co (Ma’aden), Saudi Cement and food producer Savola Group have reported quarterly earnings above analysts’ forecasts in the last couple of weeks.
The results of the survey suggested there will not be a mass outflow of funds from other Gulf markets to the Saudi market as it opens up; instead, fresh funds will be raised.
“We are not shifting from one market to another; we are rather investing new money in Saudi,” Mr Ghanim said.
Twenty per cent of fund managers now expect to raise their equity allocations to Qatar over the next three months, up from 7 per cent in last month’s survey.
* Reuters
