UAE stock markets wait on retail investors to step up

It is accepted wisdom that owning a property is financially lucrative for owners over the long term.

The language does not revolve around retail versus institutional investors. In point of fact, there has been an increase in retail ownership in key real estate markets around the world, backed by innovative leasing approaches such as Airbnb and ownership methods such as crowd funding and fractional ownership.

There are no standard disclaimers that come along with a property purchase stating that investments can go up or down in value, something that is part and parcel of the legalese that accompanies capital market literature, alongside an array of disclaimers (who really can distinguish between their Kid and KIID?).

It is clear that institutional activity dominates activity in the capital markets, with retail investors being second order actors through mutual funds or ETFs. But this approach need not sideline retail activity. In fact, in the US, stocks such as Apple, Microsoft , Nvidia, Tesla and even Berkshire Hathaway have retail investors holding between 25% and 40%.

Institutional investors needn’t come up trumps

Whilst there is literature that suggests that increased retail activity increases market volatility (which scares off issuers), there are studies that suggest institutional investors do not outperform the market. Indeed as a percentage, retail investors often do better than their institutional counterparts.

This trend has accelerated with the proliferation of tech platforms, and with the increase in financial education, the trend of information dissemination and retail activity is expected to further increase. Of course, the lion’s share over the last decade has poured into US capital markets, and it is clear that in the UAE, the emphasis has been on attracting institutional investors. (Even with the IPO bandwagon, allocations to retail investors have been relatively small for the most part.)

However, with the introduction of pension reforms, and individual retirement accounts, there appears to be a shift underway to attract a retail investor base. This is essential at all times for wealth creation, but even more so now as we have been confronted with higher inflation rates. (Which means that keeping cash in the bank is a surefire way to get poor over time.).

Then, there are the sky-high valuations in Western markets, which creates a strong investment case for the Middle Eastern markets with higher dividend yields and greater prospects for growth. A statement that often elicits laughter from most people, belying their lack of knowledge of what value these markets have to offer.

Retail investors see the bigger picture

Even as corporate activity in capital markets has increased - secondary offerings, buyouts, restructurings, corporate bond issuances alongside the IPOs - there remains little debate as to why certain phenomena is occurring. For instance, why is Aramex still trading at a 10% discount to its buy out price less than 2 weeks away from the deadline?

Despite these hindrances, the data reveals that more than 70% of retail investors who subscribed to state-owned IPOs in the beginning continue to hold them more than 2 years after their listing, suggesting a deep-rooted confidence not only in the company but also in the knowledge that capital markets are an essential engine for wealth creation. There is also a growing awareness that valuations for a lot of these companies are attractively priced.

Volumes, however, will only build when the process of investing along with information dissemination is made simpler. (Why are companies like Salik and Parkin the perfect hedge against inflation? Or, why is Burjeel embarking on a share buyback program rather than returning cash to their shareholders via increased dividends?)

There should also be incentives to invest. Perhaps, the pension and other approved funds come along with the mandate of only investing in domestic and regional capital markets.

It is only when the frequency and quality of capital market coverage increases that the investment culture will seep into the zeitgeist of society. As Alpha Data makes its way to the capital markets, the question remains as to which of the newer UAE listed companies emerge as must-have stocks.

Perhaps it starts with the companies and analysts explaining what their business model is in clear terms.