UAE mutual funds look promising

The sudden pick-up in trading volumes on the UAE stock market last week, and the Dubai Financial Market had its best day ever on Tuesday, has woken a few slumbering folk in the UAE and given those packing their bags for summer vacations reason to think again about local mutual funds.

The fact of the matter is that the UAE stock market has been an excellent investment so far this year - showing a year-to-date gain of 16% - but it has been overshadowed by 45% plus market upturns in Saudi Arabia and Kuwait, the other large regional stock markets.

A more boastful correspondent might point out that the recommendation made in March in this column has proved 100% correct. But where do we go from here?

Now a few more buyers of Emaar Properties shares last week does not necessarily mean much. Around 50% of Emaar shares are held by 30-50 individuals and they have been trading in a narrow range for almost two years. In the absence of any new shareholders, or the announcement of major news, this may be just an aberration. Emaar shares have underperformed the market so far this year, in any case, and are up only 7.5%.

However, the wider bull market case for UAE stocks is pretty easy to make, and has not changed much since the March article. A market price/earnings ratio of 16 and yield of 3.7% is cheap and barely half of the level seen in 1998.

In the meantime, oil prices have remained at much higher than expected levels and corporate profitability is seeing a strong upswing. Hence, just in order to keep this depressed price/earnings ratio then equity prices will have to rise.

Now factor in the excitement and media attention that the IMF and World Bank meetings will bring in late September, and you can see a strong case for buying UAE stocks. But how do you do it? Only three shares are open to foreigners, and this level of risk in an emerging market is perhaps unwise.

Undoubtedly the best way to play the rising UAE market is to buy a diversified country equity fund. There are two major funds: the Emirates Equity Fund from Emirates Bank Group and the National Bank of Abu Dhabi Growth Fund. The first has a focus on providing an income stream for investors and the second rolls up everything into the value of the fund.

These are not the only options, but for foreigners looking for a blue-chip local fund manager it would be hard to recommend banks with better financial strength. No investment in emerging markets, or industrialized markets, is without any risk, but unless oil prices crash, and that seems highly unlikely, then UAE equity funds look a sure winner at least in the short to medium term.