Local investors have tried to fill the breach left by the pull out of foreign funds. But markets will still be in for some turmoil over COVID-19 created uncertainties. Image Credit: Gulf News Archive

Dubai: Foreign investors remain squeamish about taking an exposure in UAE stocks, with March seeing a record shortfall in fund inflow.

“Even after being granted the MSCI emerging market status in 2013, foreign holding in DFM-listed companies remain much below desired levels,” said Vijay Valecha, Chief Investment Officer at Century Financial.

DFM saw a record shortfall in overseas investments of about Dh764 million in virus-rattled March

- Foreign investors flee amid COVID chaos

Of the 55 companies where foreign investment is permitted, foreign ownership is now at an average 10.32 per cent. Even marquee companies like Air Arabia, Commercial Bank of Dubai and Dubai Islamic Bank have foreign investments in the range of 10-20 per cent only, Valecha said.

There was significantly higher foreign selling on DFM during February, March and April, with March seeing a record shortfall in investments, equal to about Dh764 million. During April, the deficit was Dh206 million.

Selloff resonates with global panic

The latest round of foreign selloff resonates with the panic global investors were experiencing as a result of the coronavirus outbreak, and also how markets such as the UAE, like others in the GCC region, can stand to lose significantly.

When international investors reined in exposure in local markets, UAE nationals as usual took advantage and stayed put

- Local investors stay reliant while broadening market exposure

The COVID-19 spread saw investor panic peaking in March, when stocks markets worldwide recorded their worst ever selloff in decades. Although the virus remains rampant, global stocks seemed to have priced in the chaos with the March crash.

At the time when overseas foreign investors pulled back their exposures in local markets, UAE nationals took advantage and stayed put, broadening their exposure by buying back all that was sold – as is the norm.

High overseas interest until now

Dubai Financial Market until now had seen consistent foreign buying. Since January 2019, foreign investors bought Dh36.7 billion in stocks, while selling shares worth Dh34.5 billion.

Little did markets know the COVID-19 crisis would catch up and trigger a major foreign selloff that cost over Dh650 million since the start of 2020

- History dictates overseas interest will remain, question is how much?

Official stats did point out a 20 per cent increase in the value of foreign investors trading in the Abu Dhabi and Dubai markets in 2019. The net investments of non-Arab foreign investors in the UAE’s financial markets doubled 11 times in 2019, to Dh12.5 billion.

But little did markets know then the COVID-19 crisis would catch up and lead to biggest foreign selloff – triggering a decline of over Dh650 million since the start of the year. Although the historical figures indicate overseas interest will remain, the question is how much.

Foreign buyer snag predates COVID-19

The Dubai government’s buyout of a most liquid stock - DP World – was widely considered a blow to a market where liquidity is already thin and seemed to contradict the government’s strategy of positioning itself as a destination for international investors. 

Analysts did see DP World buyout as a worrying precedent for larger firms buying out smaller units without accounting for broader market impact

- Another reason why global fund managers will stay clear of Gulf equities?

It is also a good example of why market watchers think global fund managers will stay clear of Gulf equities, despite the inclusion of UAE and Saudi Arabia in the MSCI Emerging Market Indices. At the time, it was seen as a huge positive because of the funds it was expected to bring in.

Further billions in shortfall?

It has been reported that even after billions of dollars of passive inflows and the world’s largest IPO (that of Saudi Aramco), there is still a shortfall of $70 billion needed to bring funds up to market weight on Gulf equities.

However, even as global funds are still underweight on Gulf equities, analysts are confident that the UAE is making progress in deepening markets. Valecha expressed optimism saying that there are some signs of a turnaround with big institutional investors entering the scene.

Vijay Valecha

The rise in corporate investor interest is proof of the regulatory as well as corporate governance reforms which have boosted the transparency of DFM as well as ADX

- Signs of a turnaround with the ingress of many big institutional investors

According to available information, Lemanik Asset Management, Pictet Asset Management, Fidelity Investments, Ashmore and Schroder Investment are some of the recent investors in Emirates NBD.

Also, despite the real estate turmoil, Ashmore increased its stake in Emaar DB recently, and Schroder and Eaton Vance made recent purchases in Air Arabia, while Victory Capital Management has taken a stake in Tabreed, Valecha noted.

UAE stocks and foreign exposure
Since 2005, the UAE has allowed foreigners to invest in the stock markets, in order to expand invested equity volumes for shareholders in local companies. It was also done to give local public joint stock companies a chance to compete globally.

It helped the UAE to get the necessary liquidity to invest internationally and to enhance their ability to invest in various sectors, such as real estate, telecommunications, and other services.

Five years ago, the UAE was upgraded to an emerging market by MSCI Emerging Markets Index, which was a global acknowledgement that the country’s financial markets had reached international standards.