In the new year, there seems to be temptations to buy shares in companies like Tesla, Amazon, Spotify and even Snapchat. At the same time, the adage of Einhorn is the skepticism that has been applied to local and regional markets, with the inevitable comment about how it’s all related to oil prices in any event. This obsession of market commentators, investors and advisors is puzzling, especially when there is almost never any talk about investing in good companies.
These macro subjects pose questions to which no one can reliably forecast the answers. And even if you could, the connection to asset prices is tenuous at best. If we look at GDP growth for example, few things seem to obsess commentators more, yet no one has ever managed to demonstrate a positive correlation between GDP growth and asset prices.
Regarding US equity markets, it is important to note that mean reversion has been overlooked in any commentary of asset prices. A decade plus of nearly double the historical returns (fueled by cheap money) must eventually return to more sustainable returns. 2022 should be viewed as part of that adjustment process and that will likely continue.
Consider that the S&P 500 returned 330 per cent from 2010 to 2021 (excluding dividends), whereas the historical return has been closer to 8 per cent (including dividends). The opposite is true with regards to capital and asset markets in the UAE, where stellar performances by individual companies have been largely ignored. In point of fact, dividend yields have been almost cast as a negative, when in fact high dividend payouts indicate management’s confidence of generating higher free cashflows, despite the rising cost of capital that everyone loves to talk about.
Companies like Emaar, IHC, Tabreed, and new IPOs like Salik, Dewa, Taaleem and Empower have demonstrated a consistent - and yet superior - track record. That has been despite the cyclicality of oil prices. If we are to look at the wealth created in real estate markets, it has occurred despite long periods where oil prices were at levels that were considered alarming.
Dubai property market has shown the way
A fairly obvious lesson from this is to stick to basic facts where companies apply basic principles of growth generation and free cash flow growth, that have largely been ignored until recently by Western asset managers. Note the asymmetry here again: dramatic falls in share prices of Western companies are looked at buying opportunities, whereas the same is considered a negative when we see it playing out locally.
In real estate, the skepticism has been overcome, with Dubai now being considered as a global hotspot despite the historic volatility that has been witnessed. This has largely been done because of continuing proactive regulatory reform, but also because it has achieved acceptability given the critical mass of the industry, both in terms of size as well as its accessibility to data. A similar process is underway in the capital markets.
Curiously, in all of history, there has never been an example of an economy where real estate markets have flourished and the capital markets have not.
Why should investors care? It is important to highlight the siren song of investing, which is about simple metrics such as cash return on capital invested , something that many of the listed companies in the UAE have a proven track record.
An ignored detail
Yes, currently, the media does not highlight the successes as it does for Western companies (Bayanat was the best performing IPO of any market last year). But in the final analysis, we all know that people will struggle to make a good return on investments that consistently lose money or have a return that is less than the cost of capital. If we can agree on these first principles, we must recognize that companies like Emaar, Tabreed, Empower, Salik, etc., must be more highly valued than money losing companies like Spotify, Snaptchat and Gamestop.
Then a buy-and-hold strategy will always work. To follow this train of logic to its natural conclusion, we must agree that on a net basis, there is more likely to be a ‘value trap’ for most Western equities than the UAE markets.