Property, minority holders ‘weigh’ on Dubai equities

Economy strong, valuations low

DUBAI, June 13, (RTRS): Stocks are cheap and the economy is booming, but Dubai’s equity market may not recover from a severe slump until it has overcome two weaknesses: its exposure to weak property prices, and gloom among minority shareholders who have little say in listed firms.

With the exception of Qatar, which has plunged this month because of the embargo imposed on it by other Arab states, Dubai has been the worst-performing major stock market in the Middle East over the past 12 months.

Its index is up only 2.7 percent from a year ago, underperforming markets such as Kuwait, which is up 24.9 percent, and even Saudi Arabia, which has been hit hard by low oil prices but is still 3.8 percent higher.

It is far behind MSCI’s emerging market index, which is up 18.6 percent over the past 12 months.

That has surprised many fund managers and proved costly for some. Dubai is one of the Middle Eastern markets most exposed to foreign funds and it is in MSCI’s emerging market index, suggesting it should benefit from the strength of emerging markets globally.

In contrast to much of the rest of the Middle East, Dubai’s economy is growing strongly; with big tourism, foreign trade and light manufacturing sectors, it is more diverse and less vulnerable to low oil prices than other Gulf states such as Saudi Arabia.

And Dubai is looking cheap. Its market is trading at about 9.6 times projected corporate earnings for the next 12 months, compared to 13.9 times for Saudi Arabia and 12.9 times for MSCI emerging market stocks, Thomson Reuters data shows.

But all of these factors are being outweighed by Dubai’s heavy exposure to its real estate sector and by sharp losses in a few highprofile stocks, which have driven some investors out of the market, fund managers say.

“The over-dependence of the economy on real estate — which is softening — and the exposure of banks to that sector has left institutional funds with little reason to rotate aggressively into that market,” said Talal Samhouri, head of asset management at Doha-based Amwal Capital.

Real estate firms and banks, whose loan quality depends greatly on real estate prices, dominate Dubai’s bourse, accounting for almost two-fifths of its $81 billion capitalisation.

Residential real estate prices have been soft for a couple of years and while some analysts say a recovery could begin next year, the strength of any rebound is in doubt as the prospect of fresh supply weighs on prices.

Last week Dubai’s top real estate developer, Emaar Properties, tried to lift the gloom by announcing it would offer a stake in its local real estate unit to the public and use the proceeds to distribute a dividend to shareholders.

That announcement has lifted the Dubai index by about 3 percent, but another issue overhangs the market: the poor performance of several high-profile companies such as builders Arabtec and Drake & Scull (DSI). Arabtec shares have plunged 42 percent this year and DSI has lost as much as 31 percent. Both companies have embarked on complex capital restructuring plans involving steps such as share cancellations, rights issues and outside investment.