UAE stocks undervalued, holds high potential

Despite the recent stock market rally, analysts opined that UAE stocks remain undervalued, suggesting there is momentum left to further fuel the current rally.

The rally has seen Dubai Financial Market index go up by 22.42 per cent in the past month (from 1,654.60 on May 6 to 2,025.55 on June 4) and Abu Dhabi Exchange climb a more modest 8.17 per cent during the same period (from 2,591.33 to 2,803.16).

"Most of the GCC markets are fairly placed with the UAE yet to catch up in the rally act and therefore offer potential going forward," said MR Raghu, Senior Vice-President - Research, Kuwait Financial Centre (Markaz).

Mohamad Hawa, Research Analyst at Credit Suisse, added: "Dubai Financial Market has underperformed the regional markets by more than 10 per cent since the inception of the latest bout of credit crisis and we expect the anomaly to be rectified once the markets absorb the beneficial impact of the recent increase in oil prices which will shore up the budget and offer a relatively easier refinancing environment."

The extent of gains in the equity markets in the past few months have taken investors, both institutional and retail, by surprise.

In majority of the cases, high cash levels in the period between January and March have led to missing the strong rally between April and May, a new report by Markaz points out.

The steep rebound in equity markets, especially in the case of India and emerging markets, has resulted in recovering almost 75 per cent of the losses recorded in the movement from their peaks to trough levels.

The Bombay Stock Exchange market witnessed a decline from their peak of 20,687 in January 2008 to 8,160 in March 2009. Post this, the index has witnessed an appreciation of 72 per cent within a matter of two-and-a-half months.

"However, there are the other markets that are still to make their mark in this rally," said Raghu.

"For example, the UAE has witnessed a 70 per cent drop since its previous peak to trough, and has climbed by only 15 per cent, thereby underperforming significantly."

Some other GCC markets are similarly undervalued. "Kuwait, which posted a peak at 15,655 in June 2008, witnessed a trough in March 2009 at 6,392 – a decline of 59 per cent. Post this, the index has witnessed a reversal of only 21 per cent," he said.

According to an "underwater perspective" by Markaz, which evaluates how far the markets have gone under the water and therefore how much more return is left before it reaches the surface again, among the markets examined (Saudi Aranoa, the UAE, Kuwait, Qatar, China, India, emerging markets and S&P 500), the Indian markets are closest to the surface with an underwater level of $67, thereby requiring another 48 per cent to reach the surface.

On the other end of the spectrum, Saudi Arabia, which needs to gain 240 per cent to breach the surface, and the UAE, which is in need of a 190 per cent rally, are best placed to benefit from the potential.

The ranking favours countries with higher potential return to offer from the current levels. Saudi Arabia, the UAE, Kuwait and China are ranked higher. India gets the least rank on this parameter.

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