Buy UAE! Sell Saudi and Kuwait!

The UAE stock market has lagged behind the recent mini-boom in share prices in Saudi Arabia and Kuwait. Perhaps this should be a signal for investors to now switch from the Kingdom and Kuwait into UAE stocks.

Since the start of the year Saudi share prices are up by almost 10% while Kuwaiti stocks are a little over 7% ahead. By comparison shares in the vibrant UAE economy have moved up by just 3%.

Price/earnings ratios tell the same story. Shares in Saudi Arabia now trade on a p/e ratio of 21, and Kuwait is up to 18. In the UAE p/e ratios lag behind at 15. Moreover, there is nothing in terms of economic fundamentals to justify this anomaly.

The same factors driving up share prices in Kuwait and Saudi Arabia are also present in the UAE, vis-à-vis high oil prices, impressive Q1 profits and increased liquidity in the local market. All that seems to be missing is a willingness by UAE investors to put their cash into the stock market.

But is the situation not actually more favorable in the UAE than in the GCC's other two highly capitalized bourses? To an outside observer the Saudi and Kuwaiti stock market booms appear to be driven more by improving business confidence than actual investment. For example, in Saudi Arabia impressive totals for licensed new foreign investment are offered, but we have yet to actually see that investment.

By contrast the UAE is alive with construction activity and clearly experiencing an economic boom. Some companies remain obviously undervalued, such as Emaar Properties, which is developing all the best projects in Dubai and yet is valued at less than a third of its net asset value.

Only a few years ago the UAE stock market commanded a p/e ratio of almost 30. How long can it be before the market again scales those heights? There is surely a much stronger argument to support higher share prices now than was available then. What seems to be missing is investor confidence.

But all the best investment opportunities are generally staring you in the face until you have missed them. Maybe the UAE stock market is one such opportunity today.