x Abu Dhabi, UAE Thursday 20 July 2017

Funds issue bearish call over valuations of UAE equities

UAE shares make up 9.1 per cent of BlackRock’s portfolio, the single biggest country weighting, followed by Saudi Arabia, with 9 per cent, and Bangladesh, with 6.8 per cent.

Emaar is among the top 10 biggest holdings in BlackRock, representing 2.8 per cent of the total. Sarah Dea / The National
Emaar is among the top 10 biggest holdings in BlackRock, representing 2.8 per cent of the total. Sarah Dea / The National

BlackRock, the world’s largest asset manager, says it is concerned that valuations of stocks in the UAE may have outpaced prospects for profit growth after Dubai’s main equity index more than doubled last year.

“We have noted the positive sentiment surrounding both Abu Dhabi and Dubai, but are now beginning to see signs of speculative excess that warrants caution,” Sam Vecht and Emily Fletcher, the managers at the £183.8 million (Dh1.12 billion) BlackRock Frontiers Investment Trust frontier market equity fund, said in a regulatory filing on Wednesday.

UAE shares make up 9.1 per cent of the fund’s portfolio, the single biggest country weighting, followed by Saudi Arabia, with 9 per cent, and Bangladesh, with 6.8 per cent, according to the filing.

As of Janaury 31, Emaar Properties and NMC Health were among the top 10 biggest holdings in the fund, representing 2.8 per cent and 2.7 per cent respectively of the total, it said.

Shares in the UAE rallied in 2013 amid an economic turnaround, with GDP advancing more than 4 per cent as cheap credit bolstered lending at banks and property prices soared. Dubai’s successful Expo 2020 bid, the restructuring of debt and the forthcoming inclusion of UAE stocks in the MSCI Emerging Market index have also aided the return of confidence.

Dubai’s index has advanced 24 per cent this year, the best global performer after the Cypriot equity benchmark.

Foreign institutional investors do not have a massive presence in the UAE. Last month, non-Middle Eastern investors were net sellers of stocks, selling Dh508m worth of shares in total.

Institutional investors, both in the region and outside, were also net sellers, divesting Dh23 billion in January, according to a monthly bulletin from the Dubai Financial Market. Of the total Dh36bn in turnover on Dubai’s exchange, about 10 per cent was generated by non-regional foreign investors, DFM said.

The company was not alone in voicing concern about the possibility that valuations may be overheating.

“After the huge increase, the question is, is there room for growth in terms of value,” said Jérôme Droesch, the chief executive of AXA Gulf. “Current valuations need to be monitored because after a good year like 2013, we have to compare the level of the market to the level of profit that has been delivered by the different companies and what is the potential of future growth. We haven’t had enough visibility yet to assess really the situation.”

Mr Droesch said AXA had added UAE stocks last year but would not be buying or selling until they saw whether the latest round of quarterly results justified current prices.

Not all money managers agree with the assessment that stocks in the Emirates are too expensive.

Many analysts point out that shares were undervalued for a long time and that the oil-rich region’s current account surplus as well as its currency peg to the US dollar make it stand out in an emerging market landscape littered with deficits and currencies that are losing their value.

“When you look at our markets, they have run a long way but they’ve come from a very low base,” said Saleem Khokhar, the head of equities at NBAD’s asset management division.

“It is coming to what I would call fairish valuation rather than being very undervalued. When you compare us to the other GCC markets, we’re similar in terms of valuation. The underlying economies in the GCC are pretty strong. The next couple of years look very promising,” he added.

mkassem@thenational.ae