Cheapest Dubai Stocks in 8 Years Trigger Best Gain Since 2016

(Bloomberg) -- Investors just woke up to the allure of last year’s worst-performing stock market, with Bank of America Merrill Lynch and Morgan Stanley saying it’s bargain time.

Dubai’s main index, which tumbled almost 25 percent last year, had its best day on Wednesday since December 2016. Before that, the stocks had been trading at the biggest discount to their emerging-market peers since 2011.

“U.A.E. stocks look very, very attractive valuation-wise,” said Hootan Yazhari, the head of Middle East, North Africa and global frontier markets at Bank of America Merrill Lynch in Dubai. “Especially in the real-estate sector, you’ve seen a pullback over concerns on overbuilding and overcapacity. And it’s just fair, because we have seen house prices and rents falling.”

The DFM General Index climbed 2.6 percent on Wednesday to its highest level since Dec. 5. Real-estate and construction shares led the advance, with Emaar Properties PJSC rising 6.2 percent and Damac Properties PJSC rallying 4.8 percent. The gains narrowed those stocks’ losses in the past 12 months to 24 percent and 60 percent, respectively.

Though Dubai’s residential prices are down about 25 percent since their 2014 peak, about 31,500 homes will flood the market this year, double the annual demand of the past five years, according to broker Jones Lang LaSalle Inc. But after firms such as Emaar Properties and its Emaar Development PJSC unit reported profit that beat the analyst estimates, appetite for the battered stocks is growing.

Analysts boosted the estimated earnings-per-share for members of Dubai’s gauge by 11 percent in January, the most since 2015, bringing down the stocks’ 12-month estimated valuation to the lowest level in about eight years.

Morgan Stanley gave a double upgrade to United Arab Emirates stocks earlier this week, citing “various contrarian indicators pointing to a potential tactical, if not structural, turning point.” Emaar Properties fourth-quarter results were “meaningfully better-than-expected,” it said.

• The stock market’s estimated 12-months forward price-to-earnings ratio sank to as low as 6.2 earlier this month before climbing to 6.6 on Wednesday, compared with 11.8 for companies tracked by the MSCI Emerging Markets Index
• Property-related companies dominate the Dubai measure’s list of the 10 biggest decliners over the past year, including Drake & Scull International and Damac Properties Dubai Co., both of which have seen their stocks slump at least 60 percent
• All but one member of the gauge delivered fourth-quarter earnings with an average upside surprise of about 8.6 percent. That compares with a negative surprise for earnings of about 6.5 percent for the year-earlier quarter

While stocks such as Emaar Properties, Emaar Development and Damac Properties have all risen at least 10 percent in the past week, S&P Global Ratings said this week that the worst is yet to come for real estate in Dubai, with property prices falling a further 5 percent to 10 percent in 2019 before a gradual stabilization next year.

Morgan Stanley analysts Marina Zavolock, Regiane Yamanari and Katherine Carpenter pointed to further declines and an oversupply in the United Arab Emirates property market, along with oil prices, as a “key risk” to their overweight call on the stocks.

--With assistance from Ziad Daoud (Economist) and Rim Oueidat.

To contact the reporters on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Dana El Baltaji, Justin Carrigan

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