Betting On Dubai’s Comeback

The National Bank of Abu Dhabi’s One Share Exchange Traded Fund is a good vehicle for making a long-term investment in the UAE.

This ETF is a basket of the top 25 companies quoted on the stock markets of Abu Dhabi and Dubai and includes some, like Etisalat and du, which are not normally open to foreign investment. Its annual maintenance charges are tiny, well below anything a fund manager would charge you and there is no management fee.

Why then would you want to buy UAE stocks now? Well at the ArabianMoney investment newsletter we see the UAE as being in Phase One of the emerging market business cycle and this is a great moment to invest for the longer-term.

Economist Marc Faber’s book Tomorrow’s Gold explains the seven- phase business cycle for emerging markets, where nations and city-states move from boom to bust and back again in as evidenced by recognisable events and symptoms.

For an emerging market to resume its upward expansion Dr. Faber says there has to be ‘a spark’ – something serious has to change for local business to come back to life.

So what are the telltale symptoms of Phase One?

First, an ‘increase in cash balances’, we have seen that in rising UAE bank deposits; secondly ‘consumption, corporate profits and stocks begin to rise’, UAE car sales for 2012 are higher than in the boom years, local profits are up and Dubai equities gained 19 per cent last year.

Other recovery symptoms include: ‘a few contrarian foreign fund managers begin to invest’ (but perhaps they are not telling anybody yet); ‘hotel occupancy rises to 70 per cent’, actually we are closer to 80 per cent already; and ‘a significant improvement in business sentiment and investor confidence’ and yes that is evident in the HSBC PMI data.

So what events come next in Phase Two? ‘Capital spending to expand capacity soars as the improvement in economic conditions is expected to last forever (error of optimism)’. We can witness a revival in construction activity in Dubai with many new hotels ready to be delivered in 2013, for example.

Next Dr. Faber says we will see ‘large inflows of foreign funds that propel stocks to overvaluation’. That might well be the Arab Spring money that continues to flow into Dubai but not yet into the local stock market to any significant extent. The Dubai Financial Market is still more than 75 per cent down on its early 2006 all-time high.

Other events have yet to come that he cites as characterizing Phase Two. Mortgage funding has become much cheaper locally but we have not experienced a rapid expansion of credit, nor a ‘several-fold increase’ in local real estate prices. This is still to come if the Phase Two model holds as Dr. Faber’s business cycles have done for every other phase of the cycle.

There will also be; ‘new issues of stocks and bonds reaching peak levels’; ‘foreign brokers and institutions open offices’; ‘merger and acquisition activity picks up’; and ‘inflation accelerates and interest rates being to rise’.

All this ought to become very evident over the next 12 to 18 months, if this business cycle model holds true, however unlikely it might appear now. Buy that ETF!