People confuse good investments with those that have performed well.
Nowhere is this more true than when any sort of comparison is made between the equity markets and the real estate markets in the UAE. It is no secret that the property markets have surged since Covid - as they have throughout the world - with the luxury segment having turned in the most stellar of results. As the domestic property market continues to make headlines, alongwith the performance of international stocks, lost in the narrative are two critical factors:
1. The rising cost of money which has bit into the affordability criteria and has led to an increase in auctions from all segments, ranging from Palm Jumeirah apartments to Falcon City of Wonders, and
2. The resilience in earnings of domestic companies that are continuing to not only pay high rates of dividends while increasing operating earnings - therefore demonstrating predictability for investors - but also the ability of domestic companies to continue to make international acquisitions (IHC, e&). And demonstrate turnaround performances (Union Properties, Gulf Navigation, Investbank, Amlak, etc).
The reasons for this lack of visibility are somewhat puzzling, but the critic in the room declares that for every Amlak and Union Properties, there is also an Aramex. This goes back to looking at the how the stocks (and the overall indices) have performed rather than an evaluation of their intrinsic value and how they are valued relative to their replacement production levels.
The reality is that for the most part, there seems to be this continuing ignorance expressed when it comes to domestic valuations. Despite the flurry of IPOs that have taken place in the last year (with more to come in the final quarter), there is as yet an incomplete sense of understanding as to the value these domestic companies offer.
It is not merely enough to state that most of the domestic listed companies trade at a discount to their foreign counterparts. After all, similar claims are made with regards to real estate. On an absolute level, domestic companies continue to offer valuations that are compelling, and the rise in equity values throughout the world in 2023 has mostly been about meme stocks, rather than about fundamental plays.
This is about to change with the reforms announced with regards to the pension scheme and the end-of-service benefits, because what it allows is for the small investor to evaluate not only the manager of portfolios (approved managers will be announced by SCA on a continual basis), but also to look at where the monies are going. And how this affects the savings of the individual in a defined contribution scheme.
In the real estate space, which is truly the zeitgeist of Dubai and the UAE, there remains high demand. But just like in other parts of the world where mortgage demand is now at two-decade lows, the luxury end of the market is unlikely to buck the trend.
In the final analysis, the individual investor is looking at replacement value, whether it is about real estate or capital markets. The truth is that the pockets where value is being offered in domestic real estate markets is at the mid-end, and is outstripped by the valuations offered by the capital markets. As 2023 draws to a close, and domestic investors look to reshuffle their portfolios, there is an abundance of value in the capital markets that has simply not captured the imagination.
This is an opportunity to deploy, not a reason to avoid these stocks. As the level of clarity on the pension fund schemes become clearer, there will be a greater discussion on deploying capital in domestic markets, as the level of analysis and scrutiny is focused on financial (rather than on geopolitical factors). Let the debates begin.