The shares trade at rational valuations

United Arab Emirates stock market indices fell 30 per cent from their peaks in spring 2014 due to the impact of the oil shock, a surge in the United States dollar and an exodus of offshore capital from emerging markets. Lower liquidity in the money markets amid decelerating bank growth was also to blame

Since the UAE is the most diversified consumer economy in the Gulf and Abu Dhabi has accumulated $2.6 trillion in sovereign wealth funds, public spending will continue to provide momentum for economic growth. This is forecast to be at least 3 per cent in 2015, according to the International Monetary Fund. However, it is undeniable that the loss of $350bn in Gulf Cooperation Council petrocur- rency revenues will be a deflation shock from which no economy in the Arab world is immune.

Valuations have derated as every stock market index in the GCC lost 25 to 35 per cent from its peak. The UAE’s fall has been disproportionate in 2015, exceeded only by Indonesia, Russia, Brazil, Turkey, South Arica and Egypt. Yet the country does not face any systemic current account funding, banking, recession, sovereign balance sheet or geopolitical risk – unlike its bigger emerging market peers. At 12.5 times forward earnings, UAE equities now trade at a discount to Qatar and Saudi Arabia, let alone more expensive emerging markets like India, or South Africa, which trade well above 16 times earnings. Mexico trades at 20 times earnings and Indonesia trades at 15 times earnings despite the savage bear market in Jakarta shares and the rupiah.

Correlations between the Dubai Financial Market and Abu Dhabi Secu- rities Exchange increase when crude oil falls far more than when it rises. Despite the current global glut, approaching end of Iranian sanctions, Saudi Arabia’s abandonment of its role as OPEC’s swing producer and a surge in Russian/Iraqi output, drilling and exploration budgets across the global provinces of black gold have been slashed. A 1998 style free fall in crude oil to $10 is not the horizon. How- ever the ‘lower for longer’ oil price means slower earnings per share growth for most UAE companies, wider credit spreads in the corporate/sukuk bond markets and lower world trade volumes. It is no longer accurate to point to an Arabian stock market bubble.

I am mystified why China’s mini devaluation should lead to a 20 per cent fall in Emaar’s share price in the next month after August 10 2015. Emaar has slashed net debt on its balance sheet and accumulated some of the world’s most attractive trophy retail and hospitality assets. It floated Emaar Malls and Emaar Misr, increased operating margins from 35 per cent to 60 per cent since 2008, pre sold 95 per cent of its delivery schedule near property market peaks and has mul- tiple monetisation opportunities in its international businesses. The 4 per cent dividend will only grow. Emaar’s newer high margin, recurrent revenue model makes it undervalued at Dhs 6 or only 12 times forward earnings and 1.2 times price/book value.

I believe fair value on Emaar could well be nearer Dhs 9 in the next 12 months as high end expat population growth and high relative rental yields will prevent a protracted bear market in Dubai property. Lower oil prices are negative for contractors and construction compa- nies, making me unwilling to accumulate Arabtec or Drake and Skull.

Air Arabia has emerged as one of the world’s most efficient, high growth, multi-hub budget airlines and is one of the few actual beneficiaries of the oil price collapse. While the sharp falls in the Russian rouble and Asian currencies are a revenue hit, 80 per cent of passenger traffic emanates from US dollar peg coun- tries. As a favourite holding of global fund managers, Air Arabia was a predictable victim of margin call related forced selling in the emerging markets ‘black death’ in August and early September. Air Arabia is inexpensive at Dhs 1.40 or 10.4 times forward earnings.