UAE stock markets are outperforming major global indices – will more investors join in?

Following a stellar 2024 where the DFM gained more than 27%,,it is up another 18 % this year, handily outperforming its peers and even larger emerging markets like India and Brazil. As well as the S&P 500.

The DFM, unlike the US, does not seem to have a market breadth problem either, where the focus has not just been on the IPOs, including favorites such as Salik and Parkin, which have continued to outperform. It has also seen strong returns in the financials and telecom sectors, and individual turnarounds like Amlak and UPP, both of which have nearly doubled this year. Despite - or perhaps because of this - the prevailing sentiment appears to be that relative to real estate, capital markets are not as attractive in the UAE.

Indeed, this has been the case for some time, despite the fact that evidence from the local capital markets have shown that historically, the returns on stocks have exceeded those in real estate. (Where the run rate of new launches is now roughly one every 12 hours, with post-handover payment plans along with ‘return” guarantees starting to proliferate in an increasing percentage of such projects).

International commentary in other markets share similar sentiments. The fact that people understand real estate much more than they understand capital markets and that the rise of the “flipping” industry, along with tokenization has only added to money flows in real estate.

When it comes to capital markets, the preference appears to be to invest in international stocks - the median investor ‘knows’ far more about Apple or Amazon or Nvidia rather than a DEWA, ENBD or Emaar. Or participate in the growing phenomenon that is crypto.

This is somewhat puzzling because the argument being made to invest in domestic real estate is that it is still far cheaper than its counterparts in the West. Yet, the same argument apparently carries no water when it comes to capital markets, where valuation discounts do not matter.

It seems however that we are still in its infancy when it comes to understanding the role of valuations in the everyday world. That is a good thing for the thinking investor for it allows for a more critical allocation of capital to pick up on valuation discrepancies.

The flip side of this is also true - the more disengaged one is from reality the more likely that an expensive mistake will be made.

Even as Western capital markets have recovered from their turbulent first-half to set fresh records, real estate markets there have continued to struggle. And with tariffs now becoming a reality, a weaker dollar implies greater inflation creep which in turn focuses attention to cash flow. (This forms the bulk of the data set for the last 100 years).

It means that there will be a great focus on valuations and on assets/companies that are able to generate such cash flows. As demand for electricity skyrockets, infrastructure as well as data center demand implies that UAE companies such as DEWA, Tabreed and Empower stand to gain even as one questions the underlying viability of most of the AI companies that are using them.

in the final analysis, the debate between investing in real estate or capital markets, domestic or international is somewhat futile. What matters is simply the intrinsic value - the ability to generate cash flows above the hurdle rate over a long period of time.

No one is claiming that the extraordinary returns seen in the domestic capital markets will continue at its current pace. However, the case that certain companies (and sectors) will outperform remains on solid ground.