UAE stocks undervalued after sell-off due to oil fall

UAE stocks are undervalued after a sell-off that was sparked last year following a massive drop in hydrocarbons and the subsequent economic slowdown, portfolio managers said.

Prices are not reflecting the profitability of listed companies that continued to make money and meet analyst expectations during the third quarter, according to investors.

“If you look at the largest earnings contributor for the market, which is the banking sector, it was more or less in line with forecast,” said Sebastien Henin, head of asset management at The National Investor, an Abu Dhabi-based investment firm. “I think there was a 1 or 2 per cent deviation and we have seen this trend across the major sectors such as real estate and telecoms.”

The Abu Dhabi lender FGB, which boasts the largest market capitalisation of all UAE stocks, reported a third quarter net income of Dh1.42 billion versus a mean estimate among analysts of Dh1.47bn. The lender’s income for the third quarter fell 0.4 per cent from the previous year. Most other banks also held up, despite oil losing more than half of its value since mid-2014 and growth in the economy beginning to slow.

Investors also say part of the reason for UAE stocks being unloved is that the equities are now more correlated with the MSCI Emerging Markets index, a benchmark gauge of developing market stocks, which it joined in 2014. The index has been hammered this year amid a plunge in commodity prices and speculation that the US Federal Reserve will raise interest rates after seven years of rates close to zero. The index has dropped 15 per cent so far this year, roughly in line with the drop in the MSCI UAE index.

But portfolio managers point out there are outliers in countries such as the UAE that are not as reliant on hydrocarbons to fuel growth or nations such as Egypt and India, which are both net energy importers and where corporate earnings have been healthy in comparison to countries such as Brazil and Russia because the economy of the Emirates is more diversified.

The UAE’s currency has also been protected from the fallout in emerging market currencies because the dirham is pegged to the US dollar, Mr Henin said.

Dubai’s benchmark index has dropped 15 per cent this year, while Abu Dhabi’s main gauge has decreased 6.5 per cent. Both trade at price-to-earning multiples, a gauge of value, of about 9 and 10, according to portfolio managers. Typically the lower the figure, the more value there is to be had.

“UAE is looking undervalued, relative to history and the rest of the region,” said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi-based asset manager. “But having said that, one has to be very stock- specific. Third-quarter earnings was a mixed bag, but generally in line with expectations.”

A Middle East fund manager survey conducted by Reuters and published on Monday concurred. It found regional investors are most bullish about the UAE, with 36 per cent of fund managers expecting to increase exposure to UAE stocks and 7 per cent planning to reduce it.

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