UAE stocks fall in line with MSCI index after selling scramble

UAE stock valuations in step with broader developing market benchmark for first time since some of nation's companies started trading on MSCI emerging market index in June.

The Abu Dhabi Securities Exchange fell 0.7 per cent on Monday. Christopher Pike / The National

After two weeks of heavy selling of stocks amid falling oil prices, equity measures in Dubai and Abu Dhabi are now in line with the price-to-earnings ratio of a key developing market index.

In June, a handful of stocks in the UAE started trading in the MSCI Emerging Markets Index after being promoted from so-called frontier market status because of increased access to foreign investors and indications that the country was maturing financially and economically.

PE ratio measures how cheap or expensive companies are.

Dubai’s main stock measure, the Dubai Financial Market General Index, has dropped 22 per cent this month. That has wiped out gains the index made this year and entered into a so-called bear market, a moniker applied to gauges when they drop by more than 20 per cent.

Year-to-date, the measure has declined 1.3 per cent, closer in line with the MSCI Emerging Markets Index’s 6.4 per cent drop in the same period, while the Abu Dhabi Securities Market General Index has shed 2.6 per cent. Yesterday UAE stocks were little changed, with Dubai’s index rising 0.1 per cent and Abu Dhabi’s measure falling 0.7 per cent, placing the latter officially in bear market territory.

Those drops have made valuations of UAE stocks much closer to those of emerging market measures, which include stocks from countries in the throes of political and economic turmoil such as Russia and Brazil.

The Standard & Poor’s/IFC Global United Arab Emirates Price Index, a measure of equities in both Dubai and Abu Dhabi, trades at a forward multiple of 10.68 times earnings compared to 10.69 for the MSCI Emerging Markets Index.

“The premium between the emerging market stocks and UAE stocks has vanished,” said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi-based asset manager. “Some UAE stocks are now looking very attractive. If the oil price weakness is here to stay, if they remain weak for a long period of time, the case for a premium valuation becomes weaker.”

“There will be some stocks given their links to oil or oil related spending or government related spending, those stocks will be a medium term uncertainty. But stocks that are not directly linked to oil, I think there is a very strong case that yes, valuations are becoming attractive and that they should go back to their premiums.”

Investors had been willing to pay a premium for UAE stocks over other emerging markets because of massive government infrastructure spending, he added. Some were now reassessing in light of the new outlook on oil revenue.

The UAE is the world’s eighth biggest oil producer and the federal government funds more than 60 per cent of its budget from crude exports. The drop in UAE stocks comes as oil has shed more than 40 per cent of its value since June amid increasing production in countries such as the US and waning demand amid a global economic slowdown. In the past week alone, the price of crude has tumbled 12 per cent.

Stocks in Dubai and Abu Dhabi have been buoyed in the past two years by an uptick of business in the Emirates following years of slow growth in the aftermath of the 2008 global financial crash. The governments of the UAE have also been more aggressive at trying to diversify economies through spending on projects related to tourism, trade and financial services such as building the world’s biggest malls and turning the country into the de facto regional financial centre.

“Dubai is not dependent on oil. It has reached a high diversification level but the market will only turn to fundamentals when the oil market stabilises,” said Rami Sidani, the Dubai-based head of frontier market investments at the asset management firm Schroders. “In the meantime, we will continue to see very bad sentiment, which will obviously weigh on the market.”

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