How high can UAE stocks fly?

The Middle East stock markets are influenced mainly by oil revenues, but there is also a rotation between markets as investors shift their funds from one market to another in search of better value.

This year the flavour of the moment is the UAE. The bourse is up by almost 40% so far in 2004, with the last few weeks having seen some particularly frantic trading at a time of year more traditionally associated with holidays.

However, this may be more than the sort of investment surge that doubled the value of stocks in Kuwait last year and pushed Saudi shares up by some 70%. Interestingly Kuwait is 9% down so far in 2004 and Saudi Arabia has seen volatile trading but is presently 32% ahead. The UAE by contrast was a laggard in 2003, not so in 2004.

The UAE is different in that its economic boom is investment-led, with $55 billion going into Dubai real estate and tens of billions into the Abu Dhabi oil and gas sector. Nowhere else in the region is investment on this scale actually in progress, although it is being talked about.

Indeed, it is strange that the UAE bourse has taken so long to catch up with events. Until very recently the profit increases of local companies were outpacing share price rises.

And today with a price-to-earnings ratio of around 17, the UAE bourse still trades on a valuation level significantly below that of Saudi Arabia and Kuwait.

This can not be right. Investment by the UAE today will mean that profits will continue to roll when oil prices are less auspicious. The same can not really be true for Saudi Arabia and Kuwait whose investment levels per capita are very modest by comparison.

Hence the fundamentals - that is to say the profit outlook for listed companies - are strongest for the UAE bourse. At the same time the bourse itself is undergoing a major modernization program that is already improving transparency and disclosure requirements.

Add to this the news upcoming new capital markets in the Dubai International Financial Centre - which will open this autumn - and there is surely a very rosy outlook for UAE stocks.

It is hardly a bold prediction to suggest that the UAE will maintain its lead as the best performing Middle East stock market in 2004. It could well extend that lead by adjusting valuations to the very dynamic profits outlook.