How much higher can the UAE stock market go?

It is a cast-iron rule of investing that what goes up must go down. Emerging market economies offer many examples of capital markets that enjoy spectacular upturns that are followed by a market bust and then a very flat period or a renewed rally.

This happened in Kuwait last year. Stocks more than doubled in 2003, and then suffered a correction and a rally and are presently back to an all-time high. The buyer who came into the market late last year has probably lost a little sleep, though not much money as yet.

The point is that capital markets, particularly thinly traded and illiquid ones like the local markets of the GCC, are highly volatile and given to periods of irrational exuberance that dip into the wallets of late-comers.

So where does the UAE market stand today? The Shuaa Capital Index has almost doubled from its all-time low from 792.35 to 1,447.58, and is up by 52% so far this year and gained 4.5% last week alone.

On the other hand, if we look at the valuation of the benchmark Emnex index then we find that the high profits of local companies this year has made its mark. The price-to-earnings ratio of the quoted UAE companies is just 12 and the market is trading on a yield of 4.1%.

Now given that the market was trading on a price-to-earnings ratio of 18 just a few months ago, this would seem to suggest that UAE stocks have considerable upside left in them. It could be that UAE shares match the 100% plus rise seen in Kuwait in 2003 this year.

Last year in Kuwait it was a surge in optimism following the initially successful war in neighboring Iraq that sent investors into the market.

In the UAE this year the combination of high oil revenues and a spate of new mega projects, most recently the tallest building in the world in Dubai and a new global financial centre, has sparked interest in UAE stocks which have also benefited from some splendid profit statements.

The good news continues to flow and share prices look set for further price gains in the UAE. All the same there will come a point when all the good news is in the price. But as the Kuwait experience shows, so long as oil prices stay high so will share prices in the GCC and that will underpin investor confidence in the medium term.