Some days it seems book-keepers monitor and even dictate every step of the productive process, that is the lifecycle of the business.
Earnings are broken down by calendar quarters and stock performance reflects this process of disclosure, with price volatility becoming the headlines, rather than the underlying earnings engine that drives the process. Casual observers latch on to the headlines of earnings being stellar, or alternatively dropping without understanding that no business can adequately smoothen out earnings on a quarter-by-quarter basis.
As companies feel the pressure to respond to such short-term report cards, there is a greater incentive to come up with increasingly imaginative investor relations departments. With the consequence that more money is lost in tinkering with these presentations, rather than focusing on the underlying growth drivers.
In the UAE, the opposite has been true. With stellar earnings, there has been little light thrown onto the underlying dynamics of what drives the growth parameters of the business. Paradoxically, we have evolved into an ecosystem whereby there is a greater understanding on some privately-owned companies rather than their listed counterparts.
The media is then left to parse through the mandatory press that are part of the regulatory framework, and information dissemination becomes challenging for prospective investors. Adding to the curiosity, the spate of IPOs (accompanied by foreign roadshows) has seen greater primary and secondary market activity from foreign investors than domestic residents.
A rush of foreign interest in UAE IPOs
Stats suggest more than half of new investors added to the capital markets over the last year have come from abroad. In one sense, this is an astonishing achievement; there is no doubt that while real estate continues to be the dominant zeitgeist when Dubai and the UAE comes to mind, the capital markets and corporate activity is increasingly being scrutinized as bankers from the West make a beehive to the country.
Curiously, local media gets corporate stories after the foreign media on many occasions, further emphasizing the focus the country has in attracting foreign investors. However, the local ecosystem of analysts is starting to build and companies are being asked (and responding to) analytical questions as is the norm in international markets.
Similar to real estate, there is this perception that data has to be the guide in driving decision-making - but there is data and there is data. The local media has been more focused on analyzing macro trends (increase in population, interest rates, inflation etc), rather than how an individual entity is responding to these forces.
As local markets start getting deeper and more liquid, the recent IPOs have started to have their performance being reflected in share prices year-to-date, with most of them being up by double-digits, well in excess of the averages in most western markets. This short-termism may be a double-edged sword; periods of underperformance are all but guaranteed for even the best managed companies.
But there appears to be a rising floor of valuations, as investors start to understand the secular (rather than cyclical) growth prospects of these companies. Newly listed companies (such as Americana, Salik, Dewa and Empower) have started to hold detailed analyst calls to get their stories disseminated. And it is clear the markets are responding.
Fundamentals sharpen valuations
Undoubtedly rising interest and inflation (in the cases of Empower and Americana) have played a role in denting earnings for some of them. But, as investors get used to higher interest rates, cash flow generation comes into focus - and it is here that performance will be distinguished.
Most commentary is something that roughly translates into noise. However, the markets have an extraordinary ability (at times) to focus on the fundamentals over time.
For domestic residents, there is an inherent advantage they possess over their foreign counterpart, given their superior insight into the domestic economy. This home country bias, which has long since kicked in for the real estate sector, is poised to provide a further fillip to domestic valuations.
The world’s capital markets may well concentrate in America, but increasingly there is a sense that markets in the Middle East are being wired to international capital flows and brought to the investor’s door. Only a handful of decisions account for the majority of success in an investment portfolio, and there is a growing sense that companies in the Middle East are part of that successful decision-making.