Yogi Berra was famously known for his deceptively simple witticisms, sometimes often contradictory, such as ‘Nobody goes there anymore, it’s too crowded…’.
Another, which is apt for the investment world, is “It’s déjà vu all over again…’.
In 2023, world stock markets, especially in the US rallied, defying predictions for gloom and doom. This in it of itself is not a surprise; what was interesting was of course the recycled reasons for why investment experts got it wrong and the exuberance that is now around us. Despite the obvious red flags that have kept popping up throughout the year.
Foremost has perhaps been that just 7 stocks in the US (known as the ‘Magnificent 7’) accounted for more than 100 per cent of all returns of the index. The balance of the index performers ended lower.
Even though bonds rallied at the tail end of the year, signaling optimism for rate cuts, there was a noticeable drop in commercial real estate prices. And in most residential areas in the US, prices ended down (albeit by less than market forecasts) as mortgage demand sagged.
No way it’s a forever surge?
As forecasters and speculators continue to pontificate about what the latest moves are, there seems to be a sense that all is well with the Western capital markets. Even with sky-high valuations, an avalanche of re-financings that are yet to make their impact fully felt, and a shift towards markets that have shown greater propensity for growth, as well as valuations that are compelling.
With the wave of IPOs underway in the UAE and the Middle East, the quality of coverage for these companies (as well as their reporting standards) have improved. But on a fundamental level, there has been a preference for market opportunities in sectors that are growing with high population rates, as well as inorganic growth opportunities that we see through acquisitions as domestic companies start repositioning their portfolios.
This was seen in the case of Abu Dhabi National Hotels, with its stock more than doubling as it has taken over prime properties in Dubai with the Address portfolio, and with more acquisitions in the medium term.
On a more basic level, companies like Salik and Dubai Taxi have seen their shares surge by more than 64 per cent and 17 per cent, respectively (not counting for their dividends), thus increasing interest both at the retail and institutional levels.
A fair bit of discount
Despite the increase, they still trade at a discount of greater than 25 per cent to their competitors in developed markets like the US and Australia. Dividends have become a key point of education for the retail investor, because even with companies like DEWA (which trades at its IPO launch price), its paid out and reported dividends are in excess of 13 per cent. This places it in the top quantile of stock returns in the S&P500 and Nasdaq 100.
There is no doubt that the imminent Parkin IPO, following structurally the same paradigm of infrastructure monetization, will draw record interest as investors grow increasingly comfortable with the annuity streams these companies offer.
Yet, the critic in the room still longs for the capital gains they were used to in the days of zero interest rates. The most often heard other rebuttal is regarding diversification. Yet, we know from a litany of literature that too many stocks ‘spoil the broth’.
In the US, returns have been increasingly concentrated to a handful of companies. Whilst no one is arguing for their lack of relevance, there is no doubt most of these companies trade at nose-bleed valuations with every fad bringing the same four most dangerous words in the history of investing – ‘This time it’s different’.
Proponents of the market rally in 2023 are singing variations to the same tune. But history lessons suggest that mean reversion (which has long begun for most of the US market) will not spare the ‘Magnificent 7’ either.
As Yogi Berra said, “There are no new jokes - only some people who haven’t heard them before…’.