UAE equites are interestingly poised even as major global indices like SPX 500 trade at all-time highs.
The rally in global indices is supported by an ultra-dovish Federal Reserve and talk of new $5 testing kits from Abbot Laboratories, which has boosted hopes of early detection for coronavirus. Diagnosing the disease earlier will, obviously, help in controlling the pandemic.
The DFM closed lower by 0.71 per cent and ADX ended the day in the red, by 0.40 per cent. Nevertheless, the outlook seems better with investors gradually accepting this as a new normal.
At the Jackson Hole symposium, Fed Chairman Jerome Powell confirmed the US central bank will be relaxing its inflation targeting policy. The change in stance implies interest rates will not rise for the upcoming period and lead to a scenario where inflation is higher than interest rate.
It means the economy will have negative real yields and this is bullish for financial assets.
According to the new policy, Federal Reserve now expects to allow inflation to run above 2 per cent. This is being ultra-dovish in terms of monetary policy.
Watch the peg
UAE assets also will benefit from Fed policy given the dirham-dollar peg. Basically what is happening is debasement of the dollar and this should lead to dollar-denominated assets becoming expensive. In fact, the news is positive for crude, the main revenue driver of UAE economy. Crude prices are also being supported on restrained OPEC production.
Divestment
Among major corporate news, Salama (Islamic Arab Insurance Co) informed the exchanges that it received 66 million Saudi riyals from the sale of 4.5 million shares in Salama Cooperative Insurance Company, a Saudi joint stock company. The company still has 2.5 million shares left in the joint venture. The amount is significant, Salama had sales of Dh219 million and net profit of Dh64.8 million in 2019.
The stake sale is part of Salama’s business plan to focus oin the UAE, which obviously has the best fundamentals in GCC due to its diversified economy. The management may also give part of the proceeds to shareholders in the form of higher dividends.
Meanwhile, BH Mubasher has been approved as market maker For Dubai Financial Market, and this should be helpful in boosting liquidity.
Generous with dividends
This year, dividends declared by UAE companies have held up better than expected. Listed companies have paid Dh39.94billion so far while in 2019 the total was Dh42.51 billion. Companies so far have performed better than expected, considering the gravity of the pandemic created situation. Nevertheless, 2021 will be tough slog for UAE dividend chasers as companies try to conserve cash flow due to an uncertain environment.
Banks are the most generous among UAE companies, and they are likely to cut down on payments in 2021 until the situation becomes normal. The trailing 12-month dividend yield for DFM is 4.25 per cent and on ADX it is 5.38 per cent.
From a chart perspective, Emirates NBD is above the 200 day simple moving average while FAB has successfully recaptured the 50- as well as 100-day simple moving averages.
With the global risk assets rallying, we can expect UAE markets to follow suit.
- Vijay Valecha is Chief Investment Officer at Century Financial.
