Why this will be a hot summer for UAE equities

Recent economic data from the UAE is the stuff of dreams. The economy grew by 12.5% last year. There was a $10bn trade surplus. The non-oil economy is also really booming.

And yet the local stock market remains locked in a time warp, appropriate, perhaps, for the conditions of 1999 but wholly out of kilter with present day reality.

At the time of writing the UAE Emnex Index showed a price-to-earnings ratio of 15.4 and a yield of 3.2%. The Emnex itself may be up by 14% to date this year but its p/e ratio has actually fallen because local profit results have been so strong!

There is no logic to this. Strong profits should justify a higher p/e ratio, not a lower one. Indeed, with the economy this strong the p/e ratio should be in the 25-30 range, as it is in Saudi Arabia and Kuwait. So will UAE shares now play catch-up?

The signs are strong that this flow of funds will take place, if not from local sources then from Saudi Arabia and Kuwait. Brokers say that this is now happening and should begin to accelerate.

The success of the Amlak Finance IPO, with its 33-times oversubscription, has attracted investor attention, and will prompt a series of IPOs in the market over the next 12 months. This should also help to lift the market rating as a whole.

Excess liquidity persists in the region with oil revenues at record levels and this money is looking for undervalued assets as a home. It is quite remarkable that some of the best investments are so close to home and yet go unrecognized. But then how many opportunities are missed that are right under your nose?

The structural problems of the UAE bourse are well documented, and behind the scenes a lot is being done to sort things out. It is notable how quickly listed firms published their results this year, and how many published Q1 results. Transparency is certainly improving.

Moreover, IPOs will not be the only source of new listings. There is compulsory listing of public shareholding companies to come. We can also expect to see more listed firms admitting foreign shareholders, another major flaw in the market today.

But underpinning any bullish case for the UAE bourse is the local economy itself. Oil production capacity will rise by 1 million barrels per day by 2007 thanks to ongoing high investment levels; and some $50 billion will be invested in Dubai by 2010.

Any economy with this level of investment ought to have a strong stock market, and trading activity is double what it was a year ago. But local stocks should get a lot hotter this summer.