Dubai's a Bargain, at Least to Stock Pickers With Time

(Bloomberg) -- After Dubai’s benchmark stock index lost almost half its value in the past five years, it’s beginning to attract investors on the lookout for bargains.

Hobbled by a lackluster economy and languishing in the shadow of its Gulf Arab neighbors, the emirate’s stocks have dropped in three of the last four years. The main gauge peaked in 2014, when MSCI Inc. officially included the United Arab Emirates -- of which Dubai is a part -- in the emerging-markets category.

Shares in Dubai companies have now become so cheap relative to developing-nation equities that the gap in their estimated price-to-earnings ratios is near the widest since 2011.

“Dubai’s cheap stocks are for those prepared to take a longer-term view,” said Hasnain Malik, the head of equity strategy in Dubai at Tellimer, a brokerage focused on emerging markets.

Dubai's a Bargain, at Least to Stock Pickers With Time

Investors have looked past Dubai to wager on Saudi Arabia’s ascension to key developing-nation equity indexes and the prospect that Kuwait would be upgraded too. But as the rally in those markets runs its course, the emirate’s appeal is back on the radar. The DFM General Index is on track to rise about 8% in July, in what would be its best monthly performance in more than four years.

The Luxembourg-based Diversified Growth Co. – QIC GCC Equity Fund managed by Mark Krombas has been putting more money into Dubai stocks. “But it’s not necessarily a macro call,” said the senior money manager.

Dim Outlook

Indeed, while Dubai’s World Expo 2020 infrastructure projects will support the economy, the desert city continues to face headwinds from an oversupply in the real estate, hospitality and retail sectors. Analysts have lowered their expectations for growth in gross domestic product for the U.A.E. to 2.8% in 2019, down from the 3.4% seen at the end of last year, according to forecasts compiled by Bloomberg.

The U.A.E. is also taking steps to appeal to international investors by loosening some rules. A proposal by First Abu Dhabi Bank PJSC, the country’s biggest bank, to remove a cap on its foreign ownership limit may draw billions of dollars in inflows should other listed companies follow, according to EFG-Hermes.

The restriction is one reason why Emirates NBD PJSC is trading at a discount to peers in the region, said Qatar Insurance Company’s Krombas, whose fund owns shares in the biggest bank in Dubai.

The lender has a 5% limit for foreign investors that is totally filled. An increase to 20% has already been approved, but is still pending implementation.

Despite the bargains on offer, Dubai’s market “doesn’t look provocatively cheap after adjusting for sector difference,” said Morgan Harting, a money manager at AllianceBernstein in New York. U.A.E. stocks are concentrated in industries including finance and have little exposure to other sectors such as technology, which trade at higher valuations, he said.

Still, analysts have been gradually raising their earnings-per-share forecasts for companies trading on the main Dubai bourse, in contrast to cuts in their estimates for the rest of the emerging world.

Dubai's a Bargain, at Least to Stock Pickers With Time

With index-related flows into Saudi Arabia and Kuwait tapering off, Dubai offers the best potential returns in the region, said Aarthi Chandrasekaran, a portfolio manager in Abu Dhabi at Shuaa Capital. Changes to foreign-ownership limits, lower interest rates worldwide and the prospect of a weaker dollar -- to which the U.A.E’s currency is pegged -- are likely to buoy the market, she said.

“Rotation will happen,” she said. “The bigger question is timing.”

©2019 Bloomberg L.P.

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