A bullish case for UAE equity investments

With the stock markets of Saudi Arabia and Kuwait at all-time highs, it is a little strange to say the least that the UAE bourse has risen only a modest 8% since the start of the year.

How long will it be before the UAE bourse sprints forward to catch up the higher ratings of the Middle East's two largest bourses by market capitalization?

Size is not really an issue. The UAE stock market was until recently bigger than Kuwait's by market capitalization. However, trading activity is another thing. The UAE bourse trades less in some months than Kuwait does in a day. So can the UAE bring more players into the market to push valuations up to more realistic levels?

Let's step back one pace from that argument. Should UAE stocks be on a higher multiple than the 14.5 price/earnings multiple we see today?

Given the growth outlook for the UAE economy, 4.5% this year alone according to the IMF; the profits growth of UAE companies in Q1 and the expectations for this year; the strength of oil prices which comprise 40% of GDP; and the inward investment in progress with it is real estate in Dubai or the energy sector in Abu Dhabi. It is not hard to make a bull case for UAE equities.

OK, so the structure of the bourse and share ownership in the emirates is to blame. Is it likely to change?

The Emirates Securities and Commodities Association certainly thinks so, and its high powered new board is setting about forcing public shareholding companies to list, and unifying the trading platforms of Abu Dhabi and Dubai. It is only three years since all share trading in the UAE was done over-the-counter without trading floors, so things are moving forward.

There also needs to be more encouragement to companies to allow foreign investors to buy their shares. Thus far only Emaar Properties, Oasis Leasing and Tabreed have allowed foreign shareholders, although mutual funds such as the Emirates Equity Fund are a way around this problem for foreign investors.

On the whole, the UAE bourse seems to be a neglected investment opportunity which offers high dividend yields with little downside risk to capital. The world is rather short of such investment opportunities right now, and the UAE bourse will probably have its moment of glory in the not too distant future.