From the mid-1990s and right through the era of 0 per cent interest rates, the financial industry in the US - and the West - was producing IPOs nearly every day. And sometimes, multiple times a day.
Strikingly, the IPOs became increasingly esoteric and difficult to understand in terms of business models. Yet, money poured in under the guise of technological and financial innovation.
Individual investors - long adjusted to buying ETFs - now had to reckon with stocks like Wework, SnapChat, Plug, Chewy, Gamestop as fund managers went for performance chasing. Despite the fact that company after company has fallen to earth, the urge to invest in America continues despite the high valuations this offers.
There is no arguing with the success of Apple and Microsoft, but equally true is that only a handful of such companies account for all of the positive performance of indices over the last five years. The industry seems to love complexity and abhor simplicity (viewed pejoratively), with the more complex the model, the more you have managers, traders, analysts and risk managers jumping on the bandwagon.
The industry seems to love complexity and abhor simplicity (viewed pejoratively), with the more complex the model, the more you have managers, traders, analysts and risk managers jumping on the bandwagon.
In the UAE, the approach has been the other way round for the most part, with IPOs for the most part sticking to simple fundamentals like dividends and organic and sensible acquisitive growth, with astonishing results. Yet, the zeitgeist seems to still be in favor of the gimmickier investment model in terms of performance chasing the hoi polloi of the financial world.
We know that there has been a paucity of supply in terms of new offerings in the West, and a pruning of valuations for most industries as interest rates remain elevated. In the UAE, this too has had an impact on earnings, but for the most part, operational earnings have been robust and an increasing number of investors have taken exposure as reality dawns on the changing paradigm of domestic capital markets.
Such has been demand that everyone from supermarkets to crypto players to blue-blooded investment banks such as Investcorp have thrown their hat in the ring to tap into the latency of demand and capitalize on growth opportunities (alongside cash flow distribution) these companies offer.
The two most quoted criticisms mentioned are:
- Size - both of the companies and the market as a whole - as well as the opportunities that these companies have in terms of growth, and;
- The economy seems to run primarily on real estate sentiments.
These are for the most part spurious. Companies like IHC, the Adnoc Group, e&, FAB (which only a few months ago was looking to acquire Standard Chartered, indicating its scale of ambition), Emirates NBD, and Emaar have grown at stunning rates.
This, of course, does not include the likes of non-listed entities such as Emirates airline, flydubai and Emirates Global Aluminium.
Favourable cash flow
More critically, smaller companies are arguably even better placed in the case of Salik and Empower, as they enjoy near monopolistic cash flow generating abilities, giving investors plenty of comfort, while knowing that in a higher interest rate world, complexity is not necessarily a virtue.
Real estate may have been a driver of growth (with more IPOs in this sector to come), but in money centers, financial markets inevitably take over as the need for capital to fund new and existing ventures takes on a more formalized approach.
There is everything going on in the marketplace all of a sudden, from takeovers to restructurings to acquisitions to pension fund reform. And the fact that international market players such as Goldman and Citigroup are now entering as ‘market stabilizers’ buttresses the obvious case for the individual investor: the UAE markets simply offer a better value and growth proposition than their Western counterparts.
This does not imply that there will not be periods of volatility. Instead, what it does indicate is the need to be more fully invested, in world-class companies that are only now gearing up for the next stage of growth. All the while keeping it ‘simple’.