Growing unrest in the Middle East sent Dubai stocks to the cheapest level in the world relative to company assets, a signal to ING Groep NV and Charlemagne Capital Ltd. that shares in the region’s financial hub are worth buying.
The Dubai Financial Market General Index’s 13 percent drop this year left it valued at 0.6 times net assets, or book value, a 67 percent discount to the global average and the least since Bloomberg began compiling the data four years ago. Emirates NBD PJSC, the United Arab Emirates’ biggest bank by assets, fetches 3.15 dirhams ($0.86) even after the company said last month its book value was about 6.06 dirhams a share on Dec. 31.
Stocks sank as protests that unseated governments in Egypt and Tunisia spread across the Middle East, threatening to slow growth in Dubai, the regional headquarters for global firms from Goldman Sachs Group Inc. to Morgan Stanley. The emirate’s 0.4 percent inflation rate and 0.8 percent unemployment set Dubai apart, reducing the likelihood of turmoil and presenting opportunities for investors, ING and Charlemagne Capital say.
“Worst-case scenarios are being priced in,” said Mark Krombas, a London-based money manager at Charlemagne Capital, which oversees about $3.5 billion in emerging markets. “For those who are brave and for value investors with patience, there are very strong opportunities.”
The DFM index jumped 2.2 percent to 1,443.28 today for the biggest advance among world equity indexes. The MSCI Emerging Markets Index climbed 0.2 percent as of 10:23 a.m. in London.
Share prices may rally back above book values in the next few years as an expanding regional economy helps boost Dubai’s return on equity, Krombas said. The gauge of how much companies earn for each dollar invested has rebounded to 9.1 percent from a low of 3.2 percent at the end of 2009, according to data compiled by Bloomberg. That compares with a peak of 28 percent in November 2007.
The DFM index trades for 5.7 times analysts’ 12-month earnings estimates, the lowest level worldwide and 30 percent below the average of 8.1 times during the past four years, according to data compiled by Bloomberg. Companies in the index pay dividends amounting to 4.1 percent of their share prices, almost double the 2.2 percent dividend yield on the MSCI Emerging Markets Index.
“The extent of the undervaluation is greater here than anywhere else and it does indicate a lack of confidence in Dubai,” said Paul Cooper, Dubai-based managing director at Sarasin-Alpen & Partners Ltd., which oversees more than $500 million in the Middle East. “Investors are not basing their decisions on fundamentals or valuations but rather a fear of the unknown.”
Swings in investor sentiment during the past five years have made Dubai one of the world’s most volatile equity markets. The DFM index’s 90-day volatility, a gauge of share-price swings, is the seventh-highest among major emerging and developed markets tracked by Bloomberg after climbing to 22 from 15 at the end of January.
The DFM index surged 493 percent between 2003 and 2007, with shares trading for as much as 3 times book value, as the government and state-owned companies borrowed more than $100 billion to create a business and tourism hub that’s home to the world’s tallest skyscraper and palm-shaped islands off its coast.
The benchmark equity gauge lost 72 percent the following year as the global financial crisis shut off access to credit and sparked a 62 percent plunge in Dubai real-estate prices. Dubai World, a state-owned holding company, rocked global financial markets in late 2009 after saying it would have to restructure debt.
The DFM index tumbled to the lowest level since 2004 last week after popular protests that toppled leaders in Tunisia and Egypt spread to Bahrain, Yemen, Iran and Oman, which shares a border with the U.A.E. Libyan rebels seeking to end Muammar Qaddafi’s 41-year rule have clashed with security forces in a conflict that’s left 6,000 people dead, Abdullah al-Mahdi, a spokesman for opposition forces, said on March 5.
Some websites have called for “Day of Rage” in Saudi Arabia on March 11 and March 20, Human Rights Watch said Feb 28.
There’s “nervousness that the Libya situation escalates across the region,” said Jeff Chowdhry, the London-based head of emerging-market equities at F&C Asset Management Plc, which manages about $163 billion worldwide. “There’s been a big correction, but there’s no stock that I’ve done work on in the Middle East today that appeals to me on a valuation level. For that value to emerge for me, the markets would have to move down more than 30 percent from current levels.”
Equity valuations have declined below Dubai’s levels in countries facing financial and political upheaval.
In the U.S. banking crisis two years ago, the Standard & Poor’s 500 Financials Index sank to as low as 0.5 times book value, and shares didn’t rally until after the companies got about $650 billion of fresh capital injections, according to data compiled by Bloomberg. Russian equities fell to 0.2 times net assets in October 1998 after the government defaulted on $40 billion of domestic debt, according to MSCI Inc.
Thornburg Investment Management’s Lewis Kaufman says he’s finding better opportunities to buy stocks in developing nations including China that have faster growth than the Middle East and aren’t surrounded by political turmoil.
“I can participate in new opportunities in a lot of other markets that have suffered from inflation pressures but don’t have anywhere near the same degree of downside risk from geopolitical contagion or unrest in their own backyard,” said Kaufman, whose holdings include Daphne International Holdings Ltd., a Shanghai-based shoe retailer that’s retreated 9.6 percent this year and trades for 4.6 times book value, down from a peak of 16 times in April 2007.
His Thornburg Developing World Fund has outperformed 97 percent of peers in the past year.
Dubai’s economy, which expanded 2.5 percent in the first nine months of 2010, doesn’t share the combination of high inflation and unemployment that fueled protests in Egypt and Tunisia.
The emirate’s laws requiring dismissed workers to leave the country within 30 days of employment visas ending sent the jobless rate to 0.8 percent in 2009, compared with about 9 percent in Egypt. The Dubai Statistics Center hasn’t yet compiled last year’s unemployment figures. Egypt’s 11 percent inflation rate is about 27 times faster than Dubai’s, according to government data.
Berlin Wall Moment
While Fitch Ratings cited the drag on economic growth from protests in Bahrain and Egypt for credit downgrades this year, the International Monetary Fund predicts political reforms following the unrest will lead to higher long-term expansion rates in the region. Jim O’Neill, the chairman of Goldman Sachs’s asset management unit in London, said in a Feb. 14 interview on Bloomberg Television that the popular uprisings resemble the collapse of the Berlin Wall two decades ago and may boost growth by opening Middle Eastern countries to world trade.
“Economic prosperity is enhanced when you move from closed economies to open economies,” said Fadi Al Said, a Dubai-based senior investment manager at ING Investment Management, which oversees about $518 billion worldwide. His ING L Invest - Middle East & North Africa fund beat 88 percent of peers in the past year, according to data compiled by Bloomberg. “It sets up a very positive environment for businesses to blossom,” he said.
Dubai’s dollar-denominated sukuk bonds have returned 1.5 percent this year, while credit default swaps insuring against nonpayment by Dubai climbed 30 basis points, or 0.3 percentage point, to 445, according to data provider CMA in New York. The increase compares with a 130 basis-point jump to 372 for Egypt.
Dubai’s debt isn’t graded by credit rating companies, though neighboring Abu Dhabi is rated Aa2 at Moody’s Investors Service, the third-highest investment-grade ranking. Abu Dhabi, one of the U.A.E.’s seven sheikhdoms along with Dubai, provided a $10 billion bailout for Dubai World in December 2009.
Fitch cut Egypt’s credit rating to BB, two levels below investment grade, from BB+, the agency said in a statement on Feb. 3. Moody’s reduced the North African country by one step to an equivalent Ba2 on Jan 31.
There are signs that profit growth in Dubai is accelerating as the global economy expands. Emirates NBD said on Feb. 10 that fourth-quarter earnings more than doubled, beating analysts’ estimates, as loan-loss provisions declined. The stock is trading 15 percent below the average 12-month price estimate of five analysts compiled by Bloomberg.
Emaar Properties PJSC, builder of the world’s tallest tower, said on Feb. 10 that fourth-quarter revenue increased to about 3.8 billion dirhams from 2.98 billion billion dirhams while operating profit was little changed from a year earlier. The stock closed at 2.56 dirhams yesterday, or 50 percent below the company’s reported book value of 5.10 dirhams a share, data compiled by Bloomberg show. The average 12-month price forecast for the stock is 4.94 dirhams, according to nine estimates compiled by Bloomberg.
“The sharp decline in stock prices have resulted in very attractive valuations in Dubai,” said Yong Wei Lee, who helps oversee about $1.2 billion as a senior fund manager at Emirates NBD Asset Management in Dubai. “As long as stability returns to this region, then over the medium to long term, buying stocks at current levels should provide attractive returns.”
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