The Dubai Financial Market. This year will be about stock picking with a focus on fundamentals, analysts say. Image Credit: Ahmed Ramzan/Gulf News Archives

Dubai: After a lacklustre first quarter in the UAE equity markets, market participants say the second quarter looks more promising with high liquidity after a strong start to the earnings season. But investors are advised to cherry pick strong stocks with reasonable valuations.

On Thursday, the Dubai Financial Market General Index jumped more than 3.5 per cent higher at 4,079.91, after gaining more than 8 per cent in the previous week.

“2015 is a year of hard work. My view is that this year there would be a lot of divergent macro themes at play, therefore one should focus on fundamentals of individual companies, and avoid companies where fundamentals don’t stack up,” Sachin Mohindra, portfolio manager, at InvestAD told Gulf News.

“This year will be about stock picking with a focus on fundamentals. We already have divergent policies of central banks across the globe and we have the oil price volatility, so I would like investors to focus on good companies and buy them at right valuations rather than second guess broad macro themes,” Mohindra said.

Investors must take into account both the qualitative and quantitative factors before picking up stocks.

“Investors should ascertain, is it a good business? Is it something that can grow on a sustainable basis? And then choose a good company with the best valuation, which could give you good returns over a period of 12 months,” Mohindra said.

Across the region investors should identify 25-30 companies where business fundamentals and valuations are good, and wait for returns to come in, industry participants feel.

The earnings season started on a positive note with results from Dubai Islamic Bank.

“The DFM was down in the first quarter as nobody bought banks ahead of the dividend season. People came back to Dubai and Abu Dhabi after stocks went ex-dividends. If first quarter bank results are better than expected and can convince analysts and investors that they won’t see a squeeze in margins, banks may see a further rally,” said Sanyalaksna Manibhandu, manager of research, National Bank of Abu Dhabi Securities.

The bank’s net profit jumped 34 per cent to Dh850 million, while total income also jumped 19 per cent to reach Dh1.8 billion.

“Banks would be the focus in the second quarter after investors gave a thumbs down in the first quarter looking at slumping crude oil prices. We need to see the trend shown by Dubai Islamic Bank confirmed by other banks. If banks are doing well, that is they are in a position to raise deposits, give loans then that means that the rest of the economy is in good condition,” Manibhandu said.

Investors would also eye the results from Union Properties and other local developers to get clues on Dubai property companies.

Elsewhere in the Gulf, investors are likely to look at Saudi Arabia ahead of its opening up to foreign investors, and also Iran, where world powers get ready to lift sanctions in a country which is home to 80 million consumers.

Don’t jump on Saudi Arabia

“Saudi, which is opening up for foreigners is a huge step forward, but I wouldn’t recommend that people buy stocks at any valuations. Investors are likely to price the geopolitical tensions with the risk premium, and would be built-up in valuations,” Mohindra said.

Saudi Arabia will open its more than $500 billion stock market to foreign institutions from June 15, the regulator said in a statement on Thursday.

Saudi Arabia, which contributes to 50 per cent of the GDP of Middle East and North Africa (Mena) and 50 per cent of market capitalisation of the region, announced the move last July, saying it would help them in diversifying the economy and thereby create more jobs.

“Geopolitical uncertainty is something that the regional investors have seen in the past as well, and Yemen is something similar but in closer proximity,” Mohindra added.

On Iran, Mohindra said: “It is very early days for Iran as they’ve just agreed on a framework document. The deal is likely to be signed at the end of June, if everything goes as planned. It’s a big market of 80 million people, so if people are allowed to do business there would be a lot of opportunities in all sectors, and of the regional companies could be big beneficiaries. UAE and Omani companies, which have geographical proximity should benefit.”

Global themes

Elsewhere in the world, Stephen Oxley, managing director with hedge fund Pacific Alternative Asset Management Company (PAAMCO) feels that there are real opportunities in Europe.

“There are also real opportunities in certain pockets of Europe. The quantitative easing is supporting markets in Europe and may well lead growth in equity market valuations although they are already up significantly this year. Our managers are doing their best to exploit those opportunities,” said Oxley, adding “though we would see more divergence between different sectors and companies in terms of their performance. There are both long and short opportunities.”

However, uncertainties might continue to add to volatile swings in markets.

“Delay in implementing higher interest rates in the United States, possible currency manipulation or controls by other authorities along with geopolitical tensions might add volatility to markets. We think in the market environment that we have now, we need to be diversified, and should be actively managing the portfolio to react quickly to change,” Oxley said.