Oil surge, tourism explosion, Expo 2020 success, structural reforms: everything seems to be smiling in the Emirates.
The turn of the Covid
The years 2010 to 2020 can be seen as a lost decade for the United Arab Emirates: the fall in oil prices and the real estate crisis weighed on growth that had been sluggish for years before it collapsed in 2020 after the COVID-19 crisis. Back then the pandemic hit this rich country of fewer than 10 million people hard. The impressive Emirates and Etihad fleets were grounded. At the same time, the luxury hotels and huge malls had closed their doors. And in April 2020, the price of black gold plummeted, with dramatic prospects for fiscal spending in the Gulf states, including Abu Dhabi, the world’s sixth largest oil producer.
A “double penalty”, which then threatened to ring the death knell for a real estate market that had been ailing for several years due to an oversupply of real estate projects and hotels.
But two years later, the United Arab Emirates appear to be among the “winners” of the pandemic. Life returned to normal from 2021 thanks in particular to the very good management of the Covid crisis: strict health regulations (and strictly observed), large-scale PCR tests in the country but also at the borders (being one of the first countries to have done so) . ), regular recruitment in many companies, etc. The Emirates also ran a very successful mass vaccination campaign. These measures have allowed the Emirates to open their doors to tourists from October 2020 when many countries closed their borders.
Result: Dubai has become a must-visit destination for many tourists. Expo 2020 – which opened in 2021 – was a huge success, with almost 24 million visitors (that in Milan had attracted 21.5 million in a world without Covid).
Real estate in Dubai continues to rise in the first quarter of 2022: the average prices of properties sold increased by 11.3% in the first quarter.
Dubai Airport – a true aviation “hub” and the busiest in the world – is expected to almost double the number of transit passengers this year compared to 2021, with 55 million expected passengers. The record level of 2019 should be exceeded in 2024.
In terms of business development, Jebel Ali commercial port is benefiting from the strong recovery in world trade, with DP World revenue growth up 26% in 2021.
The Dubai Financial Center – DIFC – records its best results since its inception 16 years ago, with a 36% increase in registrations in 2021. Almost 1,000 new companies were registered last year, setting a new record.
The UAE is also combining technological innovation and legal initiatives to position itself as a leading regional crypto financial hub.
Revenues from the energy sector benefit from the rise in oil prices. Government spending has a strong impact on the Emirates’ economy and the increase in revenue therefore allows for some budgetary generosity that directly benefits Abu Dhabi and indirectly Dubai, which is favored by its Gulf neighbors (Saudi Arabia, Kuwait, Iraq, Oman, Bahrain etc.)
To the surprise of many observers, the real estate market is in full recovery. In 2021, the transaction volume reached a record level of 300 billion dirhams, an increase of 72% compared to 2020.
Property in Dubai continues to rise in the first quarter of 2022: according to a report by CBRE, average prices for properties sold increased by 11.3% in the first quarter.
And it’s not just a cyclical upswing in real estate demand. Indeed, investors are regaining confidence, particularly welcoming geopolitical advances and reforms that should encourage even more individuals and companies to settle in Dubai or other Emirates.
For the first time in many, many years, we are seeing a wave of new IPOs.
On the geopolitical level, for example, we mention the normalization of relations with Israel. In September 2020, the Emirates signed the Abraham Accords with the Jewish state. These agreements include diplomatic and trade relations. Relations with Qatar, a country with which the Emirates have been at odds since 2017, are also normalizing. Latest “boost” for real estate recovery: the mass arrival of Russians, the Emirates are among the few countries willing to host them since Russia’s invasion of Ukraine and the sanctions imposed on Russian citizens since then.
Alongside the arrival of these wealthy expatriates, significant reforms implemented by the government have boosted investor and end-user confidence in the real estate market. It is also about progress on a societal level (possibility of living together for unmarried couples, relaxation of the alcohol law, new visa types with “Golden Visa” for 10 years etc.) as well as reforms in the economic sector (orientation towards the “universal weekend”, from Saturday to Sunday, possibility for foreigners to own 100% in an Emirati company, etc.).
Economic activity in the Emirates is benefiting from all these favorable winds as real GDP is expected to grow by 4.6% in 2022 versus 3.4% in 2021.
Strong recovery on the stock markets
Local markets have incorporated this improvement and expect even better days. In 2021, the Abu Dhabi Index rose 76% while the Dubai stock market recorded a 32% gain. In 2022, UAE stocks continue to climb with double-digit gains, making it one of the best-performing markets in the world.
Chart: S&P UNITED ARAB EMIRATES BMI historical performance
Development companies and banks are benefiting from the rise in real estate prices – two sectors that are very well represented in the S&P UAE Index (around 60%).
The index’s sector composition and the region’s sensitivity to hydrocarbon prices continue to attract value investors. After surging sharply over the past 12 months, the S&P UAE Index is trading at about 16 times expected earnings. The average dividend yield is just under 4%.
For the first time in many, many years, we’re seeing a wave of new IPOs. The IPO of the energy supplier Dewa last week was a great success. A dozen state-controlled companies are scheduled to go public in 2022. These include SALIK, Tecom, Empower, Dubai Duty Free, Jumeirah Group and possibly even Emirates Airlines. Local family-owned companies are also encouraged to go public and the Al Habtoor/Al Futtaim group may consider listing some of its assets. Combined with raising foreign ownership limits, these IPOs should increase the UAE’s weight in emerging market indices, thereby attracting international investors.
In fact, the UAE stock market is a niche market within emerging markets. Trading volume remains low – even by EM standards – and local exchanges have a very small weight in the MSCI Emerging Markets Index (1.2% for 9 stocks).
However, after years of underperformance, Emirati equity markets appear to be benefiting from the favorable winds mentioned above. In a professional world that values remote work, the Emirates could become a preferred destination for many entrepreneurs, fund managers, venture capital firms, etc. These macroeconomic developments should benefit securities involved in real estate, finance, services and tourism.
How to invest in local stock markets
There are few ways to invest in UAE stocks. Some brokers allow investing in the largest capitalizations, but clients must be in possession of a NIN (National Identification Number) – a time-consuming process for financial intermediaries.
Large caps include Emaar Properties (EMAR:DFM), Emirates NBD (ENBD:DFM) and First Abu Dhabi Bank (FAB:ADX).
There are also some funds or ETFs, but not all are accessible to international investors. Asset managers Emirates NBD, ADCB, FAB and Al Mal Capital Market Funds invest in the region and are actively managed. The iShares MSCI UAE (UAE US) ETF is traded on the Nasdaq exchange and has a market capitalization of $40 million.
While UAE equities are currently benefiting from a benign macroeconomic and geopolitical environment, downside risks remain. First, Middle East stocks remain – at least partially – dependent on oil prices. A sharp correction in the black gold would have a negative impact on the UAE’s budget situation and rebound on the local stock markets. The Emirati dirham is pegged to the US dollar by a fixed exchange rate, which means that the UAE’s central bank has to follow in the Fed’s footsteps when it comes to monetary policy. Hence, rate hikes by the Fed imply a corresponding move in the United Arab Emirates. This could weigh on consumption, but also on the housing market due to rising mortgage interest rates. In addition, the region remains exposed to geopolitical risks. Valuations are less attractive than a year ago. Finally, local equity market liquidity remains relatively low and corporate actions should therefore be acted upon accordingly.
Note: These are not investment recommendations.