Nikhil Poddar, Equity Analyst at ADCB Securities, tells AMEinfo that the UAE market will continue to outperform its regional peers, given its relatively better growth outlook thanks to a diversified economy and strong fiscal and external buffers, as well as cheaper valuations.
How has the brokerage market been in the UAE in terms of trade volume and value?
First and foremost, it is important to stress that the lower oil price has been negative for most equity markets globally. Nonetheless, local markets have naturally been hit more – both in terms of trade volume and value – by the lower oil.
However, so far, trade volume and value in the UAE markets have kept up well with 2015 levels for the same period. Indeed, since January, the oil price has dramatically improved, partly because of the weakening US dollar, which has likewise determined a rally in global commodity markets and emerging market currencies. To the extent that sentiment in the global and regional environment remains positive – admittedly a big “if” – the UAE is very well positioned in the GCC, as it keeps attracting the largest share of capital inflows.
Both Abu Dhabi and Dubai markets have seen sharp liquidity declines during the past several months. Given the global and regional macroeconomic environment, in what direction are the country’s markets heading?
The liquidity declines were inevitable as a result of minor cash flows from the oil sector, as well as the rise in short-term US dollar rates, to which the UAE dirham is pegged. The fact that foreign institutional investors remain, however, relatively more interested in UAE markets vindicates our view that not all is gloomy in terms of general outlook.
While the UAE markets are naturally correlated to the global environment, there is now scope for the markets further stabilizing, provided the oil price remains in a range of $45 to $55 per barrel. We believe the UAE market will continue to outperform its regional peers, given its relatively better growth outlook thanks to a diversified economy and strong fiscal and external buffers, as well as cheaper valuations.
The oil price volatility, impending US Federal Reserve interest hike, Brexit, etc., are often cited by fund managers in the region as factors that will affect the sentiment of investors in the coming six months. What are the challenges and opportunities in the coming months?
The GCC and the UAE are an integral part of the global economy and market environment. As such, we are inevitably affected by global risk factors, be it Brexit or US monetary policy, or, for that matter, the risk of a devaluation of the Chinese currency. As mentioned earlier, in relative terms, the UAE is in a position of strength. Yet, we are not immune from global volatility spillovers and, thus, we will have to continue to manage our risks carefully. The opportunity of course is that, in fact, global concerns dissipate and – as investors anticipate this and overcome the proverbial “wall of fear” – our markets can strengthen following the positive economic reforms that the UAE government has recently undertaken.
After Ramadan, which is a comparatively quiet period, the companies are expected to release their second quarter results. Do you think this will give investors fresh leads?
Absolutely, yes. Currently, the market is trading sideways and lacks a substantial catalyser that would markedly move it into a specific direction. With the second quarter results, we will be able to get more guidance for the second half of the year. So far this year, results have been mixed: banks reported a weak set of numbers on account of tighter liquidity and weaker credit quality, while the real estate companies reported a steady set of results.
Which, in your opinion, will be the potential industries and companies for both foreign and domestic institutional investors in the coming quarters?
Given the tough macro-environment, we prefer non-cyclical names, stocks with lower leverage and high cash flow yields. Also, stocks with high dividend yields will be of key interest to investors. As the transportation and logistics sectors are holding up well, we will continue to see investors’ interest in DP World, Air Arabia and Aramex. Thanks to Dubai’s role as a major tourist hub, we still see potential in Dubai Parks. Another stock of key interest is Rak Ceramics, for which we think the restructuring strategy is working out well. Furthermore, the company targets a dividend payout of at least 60 per cent each year.
We have a cautious outlook on banks, as liquidity and credit quality are likely to remain key concerns. However, we have an overweight call on Emirates NBD, for which we expect earnings growth to be supported by a strong liability franchise and improving asset quality. Furthermore, the bank is well positioned to benefit from the lifting of sanctions on Iran.
What have been the advantages for the UAE markets after they were upgraded to emerging market status from frontier by the index compiler MSCI in 2014? When will they become developed markets?
The upgrade from frontier markets to emerging markets had numerous positive effects on the local economy. It has increased investor confidence, which in turn has led to strong capital inflows. Higher participation from foreign institutional investors has increased the stability in the local markets. A reclassification to developed market will be a long drawn process. However, many regulatory reforms and further liberalisation in terms of foreign ownership and trading practices, such as short selling, would have to materialise.