UAE banking and real estate stocks should lead the market's bounce back from a weak October. Image Credit: Shutterstock

The conflict in the Middle East has exerted downside pressure on Dubai equities. Other GCC indices have also suffered losses, with ADX, Tadawul & DSM down by 4.6, 3.34 and -and 7.08 per cent, respectively, in October.

The Qatar-based DSM & Dubai DFM's October losses are among the highest among its peers. Regional investors' major dilemma is whether the October drop should be taken as a temporary correction phase or a complete trend reversal.

Before the October fall, DFM was the biggest gainer in the GCC region. Investors used this opportunity to book profits on their existing holding positions. This also means that Dubai stocks, led by heavyweights Emaar and Emirates NBD, suffered a sizeable correction for October. While Emirates NBD declined 5 per cent, Emaar Properties prices suffered a 19 per cent drop.

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If history has it, outcomes of conflicts are always difficult to predict. That’s why it is always said that planning for a binary outcome during such times is often the worst possible thing.

Property comes into play

Earnings from UAE and Dubai stocks have surpassed investors’ initial expectations this year, with the major sectors of banking and real estate showing solid physical market traction. Emaar, one of the highest-weighted stocks in the index, has a backlog of almost Dh53 billion, which will be realized in 2024-25.

Hospitality, which was weak over the last quarters (more of a seasonality trend), could see outsized gains as tourists return to Dubai to enjoy the approaching winter sunshine and new attractions. This could further add to the stock's overall book revenues and earnings.

Margin pressures for banks?

As far as banking is concerned, chances of a decline in NIM (net interest margins) remain high should the US Federal Reserve pare back aggressively on its past interest rate hikes. Despite this, the overall UAE banking sector sentiment remains positive as economic growth looks to surpass the pre-pandemic era boom times.

The UAE’s diversification away from an oil led economy points towards more resilience for non-oil sectors, especially banking and real estate. The recently released UAE H1-2023 GDP number showed that the non-oil economy accounts for 70 per cent of the overall.

It’s a double whammy of central bank rate hikes and ongoing geopolitical developments for global equities. The US tech benchmark index Nasdaq 100 has corrected by almost 5 per cent from its highs in October. Valuation-wise, the DFM index still stands out as the best value pick amongst its major peers.

With its current P/E of 8.60, DFM is still trading below ADX P/E of 30.07, Tadawul P/E of 17.38 and DSM P/E of 11.45. DFM’s TTM dividend yield of 4.80% is comparable to DSM’s 5.11 per cent.

Technical levels in play

The index has bounced back from the lower trend line support zone of 3,720–3,750. For the DFM index, a further break above the resistance high of 3,950 will signify more upside potential for the index.