What a record IPO really says about the UAE bourse

What does it mean when a $30m IPO attracts $2.3 billion in subscriptions? One answer is that it shows huge liquidity in an economy with stacks of cash looking for a home.

Another simple answer is that the share price was too cheap. The winners may be the new shareholders, whose shares will rise. But the original owners, the promoters of the issue, have sold their company at a big discount to its market value.

So the real lesson from the Finance House IPO is surely for the investment banks that price these issues. More aggressive pricing is required. If somebody sold a house for 30% of what it was worth, then the agent would be sacked. Yet in the UAE stock market nobody seems to ask this question.

It is also better for the health of the UAE stock market if new issues are more realistically priced. Undervalued IPOs encourage speculation and volatility.

Last week UAE stock prices took a sudden dive, presumably while investors sold shares to pile into the Finance House IPO. Now there will be a sudden upward lurch as all that money finds its way back into the market.

Where 'successful' IPOs are useful is in attracting publicity. These market spectaculars help to wake up dormant investors to the opportunities available in the UAE stock market.

In case you might possible be one of these individuals, here is the inside track. The UAE economy grew by 12% last year and official forecasts are for 6% plus this year. And you don't need to be a genius to note that $40 per barrel oil prices that we see today are not included in this forecast.

On the other hand, the local stock market trades on a price-to-earnings multiple of 15 and a 3.4% yield. This puts the market as a whole on a very modest valuation for such a strongly growing economy.

Thus the UAE stock market remains an excellent investment opportunity. But instead of chasing IPOs which disappoint investors with very small share allocations - just 1.34% in the case of the Finance House IPO last week - the real opportunity is in buying into the whole UAE stock market via mutual funds or through key stocks.

So what a record IPO really says about the UAE bourse is that the whole market is significantly undervalued.