Last updated: March 20, 2013 2:32 pm

UAE shares show emerging markets the way

United Arab Emirates stocks are staging another new year’s recovery, outperforming other emerging markets worldwide, an index provider says.

Russell Investments’ UAE index posted a return of 23.2 per cent in the year to date as of March 11.

The index had risen 31.3 per cent in the 12 months up to March 11, but remains below peak levels of 2008.

The index is weighted 47 per cent towards the Abu Dhabi Exchange and 38 per cent towards the Dubai Financial Market, with the remainder coming from UAE companies listed on non-domestic exchanges.

The surge should be taken with a pinch of historical context: Abu Dhabi and Dubai bourses have in recent years had similar first-quarter spikes, only for 2012 and 2011 to end with “dead cat bounces” as gains quickly dissolved amid low volumes.

But some analysts are now cautiously optimistic that the underlying economic recovery in the UAE will be more sustained.

“The appetite for risk has returned,” says Mohammed Yasin, managing director of the National Bank of Abu Dhabi’s brokerage arm. “The equity markets are less afraid, fuelled by liquidity in investors’ hands and in the banks.”

The financials sector, constituting 70 per cent of the index and including real estate firms, has continued to drive the strong performance, says Russell Index’s senior research analyst, Mat Lystra.

“Real estate development and management companies have been some of the star performers in 2013, benefiting from a restart in development spending by the government and renewed interest from investors,” he says.

Dubai and Abu Dhabi have, in different ways, recovered confidence, which is encouraging investors.

A recovery in certain Dubai districts has fuelled the launch of new mega projects in the emirate, including villa complexes and tourism developments.

Abu Dhabi, whose market was hit later than Dubai’s, is still to recover to the same extent. But bankers say the capital’s government is at least funding infrastructure projects again after a spending review over the past couple of years.

NBAD’s Mr Yasin says that, while the bull run is founded in greater confidence in the real estate sector, higher-than-usual dividends have also encouraged investors to take a longer view as corporate profitability is improving.

The signs are, he says, that fewer investors are selling out after taking cash dividends.

And if liquidity continues to grow, overseas funds will be even more likely to enter the market and provide some sustained momentum, he adds.

Other analysts agree that the recovery is founded on sound fundamentals, but say growth may be more restrained.

“There are clear signs of a modest recovery in the UAE, but the pace will not match other cycles as the central bank has repeatedly sought to dampen credit growth,” says Emad Mostaque, a strategist at Noah Capital, an emerging markets stock brokerage.

Mr Mostaque says increased foreign buying has driven the markets in recent months, turning cheap valuations into ones he puts at fair value.

However, he adds: “Saudi Arabia and Qatar look considerably more attractive from a growth and valuation perspective.’’

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