Dubai's bull market in stocks may just be starting

Trading volumes have doubled in the past few months, wealthy individual investors from Saudi Arabia and Kuwait are in town, and lucrative stock tips are again discussed at dinner tables.

But the bull run in Dubai's share market may be only just beginning.

The main stock index has soared 32 percent so far this year, adding about $15 billion of value and making Dubai one of the world's best-performing markets.

However, there are reasons to think Dubai's stock market may now be in the early stages of a multi-year uptrend that reflects a broader recovery of its economy, which is expected to grow by around 4 percent this year.

Stocks are still not highly valued compared to the corporate earnings growth projected for this year; there are signs of fresh foreign money entering the market; and the real estate sector - crucial for the health of banks and state investment firms - is rebounding from a four-year slump.

"The recovery is in the beginning stage," said Nabil Al Rantisi, managing director for brokerage services at Mena Corp, an Abu Dhabi-based financial firm. "When things come back in Dubai, they come back really strong."

SPECULATORS

Some other Gulf stock markets have been dominated by short-term speculators this year. In Kuwait, the main index is up 27 percent - but most of the rise is due to gyrations in small-capital stocks favoured by speculators. The weighted index, in which big blue chips have a larger influence, is up just 9 percent this year.

Dubai's rally has been different. Two of the best-performing stocks are blue chips that are crucial to the economy: top property developer Emaar Properties, which is up 48 percent this year, and largest bank Emirates NBD, up 79 percent.

Mohammed Yasin, managing director at NBAD Securities, said such stocks had been pushed down too far in crisis period.

Dubai equities are on average now trading at about 12 times last year's earnings, or close to 10 times this year's earnings assuming profit growth of between 10 and 15 percent in 2013, he estimated.

"Historically, before the crash, Dubai averaged around 15, and some other emerging markets around the world are near there now," Yasin said. "So there's still room to grow."

Beyond stocks' valuations, Dubai has proved its trade and tourism-oriented economic model still works: foreign direct investment (FDI) in the emirate rose 17 percent last year, and traffic through its airport is expanding at double-digit rates.

Yields on bonds issued by Dubai firms, and the prices of credit default swaps (CDS) used to insure against a default by Dubai, plunged last year as bond investors bought into this view. The stock market may now be undergoing the same process.

"The CDS has stabilised, and FDI is growing. It's a recipe for business confidence," said Talal Touqan, head of research at major brokerage Al Ramz Securities.

Based on stocks' dividend yields, he calculated that a price/earnings ratio of 13.3 times might be reasonable for Dubai this year, which would roughly correspond to an index level of 2,400 points. The index closed at 2,137 points on Wednesday.

LACK OF IPOs

Still, while the stock market rally may be set to continue, few people expect it to maintain the pace seen so far this year. One problem is that while the business outlook for blue chips has improved dramatically, smaller companies on the market may struggle to benefit as much from the economic boom.

"Most of the small- and mid-cap companies faced a lot of issues in the aftermath of the financial crisis," said Sebastien Henin, portfolio manager at The National Investor in Abu Dhabi. He cited excessive borrowing and a lack of clear corporate strategies.

"These companies are expected to benefit from Dubai's economic growth, but it's very difficult to say when this will show up in their balance sheets," Henin said.

Two scheduled events this year may affect Dubai. Equity index provider MSCI will decide in June whether to upgrade the United Arab Emirates to emerging from frontier market status, a move that could attract fresh money to Dubai.

Then in November, Dubai will hear whether its bid to host the World Expo 2020 is successful. A winning bid would help to justify heavy government and corporate spending on infrastructure and real estate projects in coming years.

Even regardless of these two decisions, the outlook for Dubai's market may be positive for some time. Yasin said the emirate, and the surrounding region, were in the upward part of an economic cycle that could last for several years. If so, shares in property developer Emaar may only peak in 2014-2016, when its new projects are well underway, he said.

"I will only get worried about the market overheating if we have the same kind of gains in the second half of this year that we've seen in the first half," Yasin said. "That would suggest the market was overheating."

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