The twin exchanges of the United Arab Emirates — Dubai Financial Market (DFM) and Abu Dhabi Exchange (ADX) — have had a positive start to 2013, particularly when compared to overall emerging markets trends.
From the opening on January 2 until close on February 25, the MSCI Emerging Markets Index (MXEF) — the world’s most prominent emerging markets index — retreated by around 2 percent. In contrast the UAE benchmark indices soared in the same period: the ADX added 14.2 percent and the DFM’s rise was just a decimal short of 20 percent.
Juxtaposed with the troubles in emerging markets, which analysts saw linked to weaker prospects for exports to the United States and European Union, the gains of both ADX and DFM make the UAE equity markets look their strongest in years.
Riding the real estate
The most exciting stocks to watch in the UAE over the period were the big names in real estate. In Abu Dhabi, the slowly progressing merger project of developers Aldar and Sorouh boosted shares of both companies. From the time that their boards recommended the merger in January, up until the companies had to postpone extraordinary general meetings (EGM) of shareholders on February 21 because of insufficient stock representation, Aldar gained 4.1 percent and Sorouch 9.4 percent, according to Reuters.
Favorable votes in the shareholder assemblies are needed for approving the merger but there is high confidence that the second round of voting on March 3 — when only a 50 percent representation of stock is required for a quorum — will yield the shareholder approval.
In Dubai, the first two months of 2013 marked the resurgence of the King Kong of regional real estate stocks: Emaar Properties. The company, the developer of Burj Khalifa and arguably the region’s best-known real estate company, surged in both value and volume of trade. Between December 26 and February 25, the stock gained an astounding 43 percent and closed at its highest since those days of encroaching darkness in November 2008.
Some investors cashed out on Emaar stock when the company announced on February 26 that it will not increase its dividend payment. From a daily markets performance, this meant a snag of -2.84 percent for the company, just as other property leaders Aldar and Sorouh dropped a few days earlier in wake of their postponed EGMs. However, those kinks in the paths of the three biggest names in UAE real estate pale when gauged against the enthusiasm that these real estate stocks have attracted in the year to date.
Emaar was quite instrumental in sparking new interest in the UAE real estate equities. The company’s glowing sales reports, and stories of newly extreme demand from property buyers in the last quarter of 2012, contributed a major thread to the narrative that Dubai real estate is recouping its state as an economic driver.
While UAE watchers will be happy to see strong growth, the concurrent surge of real estate stocks and UAE indices also carries a warning message. While the past four years have been characterized by growth in tourism, retail and some industrial activities, real estate stocks seem to be the lead ingredient that makes the stock indexes fly.
The fact that the spike in the indexes coincided with property increases shows that the UAE economy is anything but de-coupled from its property market. Whether that linkage is a great thing in what it says about the perception of the UAE economy, remains a matter of perspective.
But the focus on notoriously unpredictable real estate market leaves the UAE’s stock markets prone to surges. Smart investors should be wary of this.