“There are huge advantages for an individual investor to move into a position where you make a few great investments and then sit back and wait…”
So said the late Charlie Munger of Berkshire Hathaway and Buffett confidant.
As the investing world mourns the legend’s demise, it would be appropriate to state that he would have been proud of the way UAE retail investors have reacted to some of the offerings in the domestic capital market.
“We like to go fishing where the fish are…” Munger often said.
As part of Berkshire’s investment philosophy, Buffett and Munger invested in all corners of the world as US valuations became increasingly stretched, including Japan, China and South Korea. In the UAE, the valuation story has been similarly compelling (similar to when the freehold property phenomena started in 2002).
In the UAE, the valuation story has been similarly compelling (similar to when the freehold property phenomena started in 2002).
So too is the case with capital markets, as government reforms made the case for an influx of capital from expats and foreign investors. It is astonishing to see how quickly the sentiments have changed in the post-Covid world, with capital markets now moving to the front and center of the allocation spectrum from the traditional real estate asset class.
The DFM index has risen by more than 20 per cent this year, with Emaar, ENBD, Gulf Navigation, Salik, Empower, Tecom and Taaleem having fared much better. This has sparked a growing understanding in the ecosystem of the value proposition many of the companies are providing/
Companies (both private and semi-government) are in turn rushing to raise capital as a pas de deux play. As more companies line up (imminent candidates include PureHealth), what is heartening is the increasing attention that is being paid to valuations, cash flow generation, dividends and disclosure.
UAE capital market reforms will onboard more investors
Dubai Taxi was offered at an earnings multiple of 17, with a dividend yield of nearly 5 per cent. Lyft (its closest comparison in terms of size and business model) in the US has continued to lose money (its shares have fallen 85 per cent in the last 5 years).
These differences are only now becoming the topic of everyday conversation, as information dissemination increased and the media has finally caught on to the underlying dynamics. But investing is also much to do with psychology.
As the record oversubscription of Dubai Taxi IPO shows, the investor’s basic understanding of the business model overwhelms the tradeoff for ‘home bias’. It helps that rising interest rates and falling earnings in most Western markets have made the relative case for domestic investments even more obvious.
Confirmation bias is a red flag all investors need to look out for, and there is an danger in following the herd. But equally, simplicity and clarity in thinking is inbuilt for a reason - most times it serves us well.
The UAE capital markets have amply demonstrated that, and it is no surprise that hedge funds have flocked to this part of the world as they look for new opportunities, recognizing the valuation mismatch that can be capitalized on. Pension fund reform is on the anvil and soon will allow for greater participation in exchange traded products.
One for the small investor
But there is already a sense that individual investors are not waiting till then; they are catching the fish now. ‘Recognize when the odds are in your favor; that’s the time to act’ was another great quote of Munger.
The median small investor has recognized this simple pearl of wisdom in the most recent offering of the Dubai Taxi IPO, an excellent company where the structural advantages are firmly in its favor, as it has been for the likes of Salik, Empower, and the ADNOC portfolio.
Not all offerings will be lucrative; in fact data suggests that most will be below average. For the most part, where great companies have been offered at reasonable prices - Munger had grown increasingly wary of US valuations in the last few years - investors have responded in droves.
His lessons on investing have been well heeded in the domestic capital markets. Long may it continue…