UAE equities: a successful recovery from the pandemic

The UAE is one of the pandemic's top gainers; high oil prices, value stocks, real estate markets improving, covid-19 cases under control, and geopolitical stability make up the backdrop to what could be a greenfield opportunity.  

March 2020. It's not just the heat that's becoming stifling in the United Arab Emirates. An unprecedented crisis is descending on this rich country of less than 10 million people. The COVID-19 pandemic has grounded the impressive fleets of Emirates and Etihad airlines. Giant luxury hotels and malls closed their doors with a bang.

A few weeks later, the price of black gold collapses, with dramatic effects on the budgetary expenses of the Gulf countries, including Abu Dhabi, the world's sixth largest oil producer.

A "double whammy" that could sound the death bell for a real estate market that had been struggling for several years already, due to an oversupply of real estate and hotel projects.

But 15 months later, the United Arab Emirates seems to be among the "winners" of the pandemic. For months now, life has "almost" returned to normal, thanks in particular to a very good management of the pandemic: strict sanitary measures (which have been respected to the letter), including the wearing of masks, large-scale PCR testing in the country but also at the borders (one of the first countries to do so), regular tracing of personnel in many companies, etc. The UAE has also implemented a very successful mass vaccination campaign. These measures allowed the Emirates to open its doors to tourists as early as October 2020, at a time when many countries were closing their borders.

Results: no new waves or lockdowns. Dubai has even become a must-see destination for many tourists this winter. More than 200,000 travelers came to Dubai for the holiday season, many of them for the first time. Celebrities have not hesitated to promote it.

It is true that Dubai and Abu Dhabi airports, true aviation hubs, have not returned to their pre-pandemic traffic levels. But the rebound is there, with the level of fuel demanded by airlines up by 40% compared to 2020.

In terms of business, Jebel Ali Commercial Port is benefiting from the strong recovery in global trade, with the number of transactions recorded at the end of April up by 70% compared to 2020.

The Dubai Financial Centre - the DIFC - is recording its best results since its inception 16 years ago with a 20% increase in registrations in Q1 2021 (year-on-year).

Energy sector revenues are well ahead of expectations due to the improvement in oil prices. Government spending has a strong impact on the UAE economy and the increase in revenue therefore allows for a certain fiscal generosity that directly benefits Abu Dhabi and indirectly Dubai, which is highly visited by its Gulf neighbors (Saudi Arabia, Kuwait, Iraq, Oman, Bahrain, etc.).

To the surprise of many observers, the real estate market is in full recovery. The volume of sales of luxury apartments and villas is up by 20% year-on-year and prices are up for the first time in 6 years

But it's not just a cyclical recovery in real estate demand. Investors are regaining confidence, welcoming geopolitical advances and reforms that should lead to more individuals and companies choosing Dubai and other emirates as their home.

On the geopolitical front, the normalization of relations with Israel is a case in point. In September, the UAE signed the Abrahamic Agreement with the Jewish state. These agreements include diplomatic and trade relations. Relations are also normalizing with Qatar, a country with which the Emirates had been on the outs since 2017.

In November, the UAE introduced reforms both on the societal level (possibility for unmarried couples to cohabit, relaxation of alcohol laws, new types of visas, etc.) and on the economic level (for example, UAE companies can now be 100% foreign-owned).

Strong recovery in equity markets

Local markets have embraced the upturn and are looking forward to even better days. Indeed, the S&P UAE Composite Index (Total Return) is up 26% year-to-date. Compared to the March 2020 low, the index is up 94%, a clear outperformance compared to the S&P 500 or the MSCI Emerging Markets.

Rising real estate prices are benefiting development companies and banks - two sectors that are heavily represented in the Dubai DFM-listed equity index (more than 70% of the S&P UAE index versus less than 30% for the Abu Dhabi index). The best performers were property leader Emaar Properties and Emirates Bank NBD - two stocks that have doubled in price since the March 2020 lows.

The low valuation of the stocks also attracted value investors. Even after the sharp rise, the Dubai DFM index is trading on multiples of 21x trailing 12-month earnings and 13x expected one-year earnings. Earnings of Dubai-listed companies are expected to rise by 65% in 2021 compared to last year.

In Abu Dhabi, the government has played an active role in improving market liquidity and assisting in the restructuring of listed companies such as Aldar Properties (real estate development) and Agthia Group (foodstuffs) in 2020. New quasi-government companies such as IHC Holding have also been listed. The stock price of this company, which is active in the industrial and health sectors, has risen 10 times since the beginning of the year. It is now the largest market capitalization in the index (200 billion dirhams or about $55 billion).

Other stocks also contributed to the rise in the Abu Dhabi ADX Index (+34% year-to-date and +105% since the March 2020 lows). First Abu Dhabi Bank - the 2nd largest market capitalization - benefited from significant foreign inflows ($500 million) from managers replicating the MSCI Emerging Markets Index after the index company increased the allocation to this stock and telecommunications company Etisalat also benefited from foreign buying flows.

The UAE equity market remains a niche market in emerging markets. Trading volumes remain low - even by emerging market standards - and local exchanges have a very low weighting in the MSCI Emerging Markets Index. Local markets are relatively heavily exposed to factors - oil prices, real estate, interest rates, geopolitics - over which investors have little control.

However, after years of underperformance, the UAE equity markets could benefit from rather favorable winds such as the real estate recovery, a higher-than-expected oil price, structural reforms, the World Expo in Dubai (EXPO 2020) or the soccer World Cup in Qatar. In a business world that is increasingly focused on remote working, the UAE could become a destination of choice for many entrepreneurs, fund managers, venture capitalists, etc. These macro-economic developments should benefit securities active in real estate, finance, services and tourism.

With a price-to-book ratio of 1.2x, the market is trading at a discount of about 40% to the rest of the emerging markets. The average dividend yield is close to 4%.


How to expose your portfolio to local equity markets

There are few options for investing in UAE equities. Some brokers allow you to invest in the largest caps, but clients must have a National Identification Number (NIN) - a time-consuming process for financial intermediaries.

Some of the large caps include IHC Holdings (IHC: ADX), Emaar Properties (EMAR: DFM), Emirates NBD (ENBD: DFM) and First Abu Dhabi Bank (FAB: ADX).

There are also a few funds or ETFs, but not all of them are accessible to international investors. The iShares MSCI UAE (ticker: UAE US) trades on Nasdaq and has a market cap of $21 million. Asset managers Emirates NBD, ADCB, FAB and Al Mal Capital manage funds or mandates active in the region.

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