Dubai: It's that time of year when UAE investors, as many in other global markets, start contemplating whether to stay out of the market during the long summer period, when volumes drop and there's usually no catalyst to drive prices.
Unlike previous years, when large number of retail investors exited, this summer could be different, according to some market observers.
With the local markets stabilising from the lows of March and the possibility of the UAE being upgraded to the MSCI (Morgan Stanley Capital International) emerging markets index, investors may do well to stay put, according to those who harbour a positive outlook.
In fact some fund managers are taking a contrarian position to what the well known saying of "sell in May and go away."
A favourable MSCI decision is likely to be a strong catalyst for the UAE market, putting it on the radar of the global investors. That would lead to improvement in investment flows into the market and a re-pricing across the board, according to Rami Sidani, head of Middle East and North Africa Investments, Schroder Investment Management.
A good chance
"There is a great opportunity for investors to buy into the market ahead of the potential MSCI upgrade, given that none of it has been priced in so far. The market is cheap with a strong recovery taking place; so buying at this entry point should be considered by investors," says Sidani. And without naming specific stocks, he says he expects the most liquid blue chip stocks, to lead the rally.
Gulfmena Alternative Investments' chief executive Haissam Arabi is also putting his bets on the MSCI upgrade, particularly as MSCI have said that UAE stands a good chance.
"I wouldn't get out of blue chips such as Emaar Properties, National Bank of Abu Dhabi, First Gulf bank and DP World, which have a good chance of being included in the MSCI. In a nutshell, the upside risk is a lot more than the downside risk [of not being included]," he adds.
He is also in favour of telecom operator du, but he points out that both du and etisalat are closed to foreign investors. He is not sure what their fate will be if the MSCI upgrade were to happen.
Even if UAE was not upgraded, Sidani does not expect a negative reaction because it has not been priced into the market.
Saleem Khokhar, senior fund manager at National Bank of Abu Dhabi's Asset Management Group agrees: "There is definitely upside potential but catalysts will be required to trigger upward movements and a high degree of volatility is expected.
"A short-term trader should home in on near-term catalysts such as DP World's London listing and the likelihood of an MSCI Emerging Market upgrade. Even if the UAE does not qualify this year, an upgrade for Qatar would be positive for the GCC region and the UAE would likely follow next year," he said.
But MSCI's impact might be a bit exaggerated, says Robert McKinnon, chief investment officer at Asas Capital. "I believe it is a relative non-event. Psychologically, if it is viewed positively, people would buy but it would be a two- or three-week event. I don't think it's something that is going to sustain the market for a longer period of time.
He adds: "For international investors, I think if they [UAE markets] were included in the MSCI you would see a bit of a pop in volumes, probably temporarily as people would try to get their portfolios balanced," McKinnon points out. Though it depends on individual investors' taste for risk, the short term is probably the worst time to be in the market, according to McKinnon. He sees a turnaround probably in the fourth quarter.
Positive tone
"I think it will be a relatively tame summer, again depending on what you get out of global markets."
However, after witnessing significant volatility until the end of first quarter, the Dubai and Abu Dhabi markets are showing signs of stability, rising 20 and four per cent respectively since the lows of March. And this has come about despite uneven first quarter results.
"As the summer approaches expectations are for a lull in activity, however, the underlying tone should remain positive," says Khokhar. He points to Emirates Airlines' results as a sign of strong demand in the aviation industry. He says tourists are returning to the UAE in strength and occupancy rates in hotels have risen significantly.
Sidani points to strong trade, tourism and logistics figures, reflecting the recovery of the economy.
David Varghese, fund manager at Emirates NBD Asset Management, echoes positive sentiments, though he acknowledges summer is a difficult period.
"The summer months are typically a challenging time for investors due to reduced levels of trading volumes. As long as we see a continued rebound in regional corporate earnings, the equity markets should remain well supported."
Again, McKinnon is not so certain about the strength of the recovery and its effect on the next three months.
"I don't think there's a whole lot to push it forward. For example, I don't see a major surge in terms of the real estate and so forth. Most of that is probably going to come again in the fourth quarter. I think we are looking into a relatively slow [summer] period. One caveat to that would be a continued global equity rally that may help local markets a little bit. But I do think that even if global equities were to rally, local equities would under-perform."
Khokhar points to some factors the short-term investors need to keep in mind during the summer. Exit strategies will need to defined but need to be flexible enough to incorporate unexpected events such as political noise, sharp moves in energy prices, spikes in Credit Default Swaps (CDSs), end of phase two of US Quantitative Easing in June, Eurozone debt problems, and second quarter earnings results.
"If short-term traders are currently holding cash they should take advantage of the increased volatility as liquidity dries up. As opportunities will arise to trade on significant short-term movements in prices, however, care should be taken to target fundamentally strong companies, as these will ultimately revert to the underlying worth of the company once liquidity returns," Khokar adds.
To sustain and to continue the momentum that could be generated by an MSCI upgrade, the second quarter corporate earnings are going to be crucial, says Arabi.
It's likely that trading activity will weaken from mid-June due to early summer holidays, until August 1, when people should be back to spend Ramadan at home, says Mohammad Ali Yasin, chief investment officer of CAPM Investment, Abu Dhabi. "If that happens, this Ramadan could see better trading values than previous years and we may see a late reaction to quarter two results then."
But he believes that the markets are likely to have a positive outcome this year, with the real momentum could come in second half. And so now may be an opportune time to pick up some stocks, based on the quarter one results. In the banking and financial sector his choices are Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Union National Bank, Emirates NBD and Waha Capital; in energy, Abu Dhabi National Energy Company, also known as Taqa, and Dana Gas; in telecom, du; in the services sector, Aramex and Dubai Financial Market.
Correction
Varghese expects to see a low level of news flow from companies after they report their second-quarter earnings results. For short-term traders, it may have an impact but for long-term investors the timing of Ramadan would not alter their investment decisions, he says.
If the second-quarter results disappoints, Arabi says there could very well be a correction or the markets might remain flat until the end of Ramadan, that is early September. So, a bit of repositioning now to retain some cash to take advantage of low prices at that point may not be a bad idea, he adds.
But he prefers to stay invested. "Rather than reducing positions this May, we are saying, No way this May."
Top fund managers and their top picks
Most of the fund managers interviewed recommended blue chip stocks across sectors.
Haissam Arabi, chief executive of Gulfmena Alternative Investments prefers Emaar Properties, National Bank of Abu Dhabi, First Gulf Bank, D P World, all of which have a good chance of being included in the MSCI emerging markets index.
He also likes du, although it might not be included in the MSCI as it is not open to foreign ownership.
Mohammad Ali Yasin, chief investment officer of CAPM Investment, believes it is a good time to pick up shares to take advantage of a posible rally in the fourth quarter. In banking and finance: Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Union National Bank, Emirates NBD and Waha Capital; in energy Abu Dhabi National Energy Company, also known as Taqa, and Dana Gas; in telecom du; in services sector, Aramex and Dubai Financial Market.
Without naming specific stocks, Rami Sidani, head of Mena investments at Schroder Investment Management recommended a look at some of the blue chip banking stocks.
