UAE investors can play safe opting for dividends in inflationary times

They say the news media provide the rough first draft of history. These are the drafts that strive to capture the noise of events, big and small, which later historians can then belittle or admire based on the added knowledge they get to have. And what a mess is it that they record.

At the end of 2008, the media narrative captured soundbites of analysts who predicted that the Dubai real estate market would fall 80 per cent from its peak. Not six months earlier, headlines abounded of prices expected to rise 50 per cent from then levels. The discourse from 2017-21 was about a systemic oversupply in the real estate industry. That then gave way to a chronic undersupply narrative in the last few months.

The current carnage in the global markets where the ‘everything rally’ is now over has given way to the narrative of ‘nowhere to hide’. Of course, the Svengali defense is that the media is merely echoing the zeitgeist at large. But it is obvious that more ‘noise’ has been recorded, a trend that has been amplified by the prominence of social media. The click-bait headlines are the ones that are meant to attract, and yet end up doing the most damage. It is no wonder most investors are left discombobulated.

Chase inflating-hedgers

Given the current environment of fear, what exactly should investors pay heed to in Dubai? The angst-fueled ecosystem during Covid was just the most recent example of investors that profited from the noise that played on the psychosis of fear. In the present environment where all the talk is dominated by inflationary concerns, the answer again lies in the landscape of opportunities presented by the government. IPOs (both launched and in the offing) that offer a stable annuity stream of dividends are the ones that are likely to outperform, to satiate the dynamic at play.

With interest rates rising swiftly, and absurd valuations giving ground, there is a return to first principles for investments in stable sectors such as utilities, telecommunications, energy and the like. It is these companies that will shield investors from the deleterious effects of rising inflationary pressures. Real estate plays a role here too, albeit in areas where the market values are still not significantly higher than their replacement costs (which itself is rising, given the cost push dynamic).

It is no comfort to merely state that real estate (or equities) are a hedge against rising inflation. The reduction in valuations we are seeing across most asset classes not only puts that notion to bed, but also is a recognition that outsized returns being generated by new-fangled ideas in a zero interest rate environment has drawn to a close. Rather, whether in real estate or equities, it is the dividend yielding plays that stand the test of time, boring and unfashionable as it may be.

Opt for steady income streams

We see this already playing out in developed markets, where even as market indices have cratered as much as 20 per cent since the start of the year, dividend yielding plays have been up by more than 7 per cent. This glaring statistic has not yet made its way to the headlines, but you can be sure that by the time that it does, the upside potential will have already been largely captured.

Embedded in this commentary is an ironic fact: most headlines and commentaries need to be ignored. When history is sifted clean of the noise (it is arguable if it ever does) through the lens of time, what we see is that fundamentals both on a macro and a micro-level are what matter most in terms of wealth creation. At the macro level, continuing government initiatives for the retail investor imply that the best action is to capitalize on the opportunities, both in the capital markets (such as DEWA, Salik, Tecom, Empower and the like), as well as real estate. The objective is to be selective, looking at the twin factors of replacement value and annuity type returns.

And what to make of the headlines themselves? It is not easy, but the only approach is to ignore the click-bait. To do anything else would be to suffer from a malady known as non compos mentis.