Banks and property lead Dubai bourse to eight-year high 

• Dubai’s stock index has risen almost 20% this year
• It is still at less than half of its 2005 high
• Real estate and financial services are key to its growth

Dubai’s stock index hit eight-year highs this week, extending a bull rally that has enabled the once-beleaguered bourse to outperform its regional rivals in 2023.

The emirate’s benchmark rose 1.0 percent to 3,962 points on Thursday, its highest close since July 2015 to take its gains this year to 19.9 percent.

Saudi Arabia’s index is up 10.7 percent in 2023, while Abu Dhabi and Qatar are down 5.9 and 4.1 percent respectively.

Of these four markets, Dubai is unique in that it is less of a proxy for oil or liquefied natural gas prices and, on a longer timeframe, its index remains a laggard; in 2022, Abu Dhabi hit an all-time peak and Saudi reached a 16-year high.

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In contrast, Dubai’s benchmark is still down more than by more than one-half on its 2005 record high and is about one-fifth below another notable peak in 2014, despite its extended bull run in 2023.

That suggests it can make further gains.

Valuations are far from stretched, especially as the bourse’s two heavyweight sectors – real estate and financial services – are among the biggest beneficiaries of the UAE’s post-pandemic economic boom. The country’s GDP expanded 7.9 percent in 2022, according to the federal government.

Dubai’s population is around 3.6 million, the government revealed last month, up from 3.36 million in 2019.

This influx helped spur a renewed property sector rally, ending a seven-year residential price slump and lifting real estate stocks. According to property website Bayut, Dubai’s residential rental price index increased 26.4 percent year-on-year to March 31.

“That’s a good indicator of solid end-user demand for real estate and that the boom is not just based on speculative activity,” said Ibrahim Masood, senior director of equity portfolio management at Mashreq Capital in Dubai.

Banks have benefitted from soaring interest rates, which have bolstered their net interest margins and income.

Shares in Emirates NBD, Dubai’s largest lender, hit a record high this week. The government-run bank’s first-quarter net profit more than doubled year-on-year.

Similarly, the population increase makes utilities stocks such as Dubai Electricity and Water (Dewa) attractive. Dewa’s shares are up 8.0 percent since its $6.1 billion IPO last year.

“The medium-term return prospects for equity investors are still solid,” said Masood.

Companies raised a combined $8.5 billion in initial public offerings in 2022 before listing on Dubai’s bourse, S&P data shows.

“Dubai is benefiting from the high level of foreign investments piling into the UAE over the past two years,” said Marwan Shurrab, a Dubai-based financial industry veteran.

“We’ve seen this in real estate and equity markets and it’s also supported by strong earnings from companies that completed IPOs recently.”

Most newly listed companies are government-controlled and from so-called defensive sectors such as utilities – those with consistent revenue streams that are not hugely affected by economic ups and downs.

Typically, such stocks provide attractive dividend yields and so helped attract more long-term investors to Dubai’s bourse, “especially as most IPOs were sold at attractive multiples compared with the regional average,” said Shurrab.

A level of caution

Despite the rally, some foreign investors are wary of buying Dubai stocks, analysts say, having suffered sizeable losses following price crashes in 2005, 2008 and 2014 that led to multi-year bear markets.

Mashreq’s Masood nonetheless highlighted how Dubai’s bourse composition and structure had changed over the past decade, when the previous bull run began.

There is greater diversity, as the likes of Dewa and toll operator Salik are now public companies, and blue chips are a smaller percentage of total market capitalisation.

Several unhappy surprises had dented investor confidence including the collapse of contractor Arabtec and the delisting of Damac Properties and Emaar Malls. The last was reabsorbed by parent company Emaar Properties, Dubai’s bellwether stock.

Emaar is up 15.9 percent at AED 6.79 ($1.85) this year, as of close on July 6, but is still down by nearly two-thirds on its 2005 peak of nearly AED 20.

Foreign investors own 41.8 percent of Emaar’s shares, 13.4 percent of those of Emirates NBD and less than 1 percent of telecom operator Du. Such levels are far below foreign ownership limits.

Although foreign ownership levels remain relatively low, such a metric is not necessarily the best way to gauge foreign investor involvement, Masood said. 

Instead, it is better to examine active investors – those who buy and sell local stocks for short to medium-term gains – than passive investors who invest according to the constituents of the benchmarks they follow, such as MSCI Emerging Markets Index.

“Active emerging market investors remain underweight on Dubai stocks due to a combination of factors – a prime one being a lack of familiarity with the region,” said Masood.

Dubai’s bluechips remain cheap in terms of their price-to-earnings ratio, a metric to compare stocks. Emirates NBD has a PE of 5.48, according to investing.com, while Emaar’s is 6.60.

“Whether it’s according to PE, price-to-book or dividend yields, Dubai’s market doesn’t look overvalued,” added Shurrab.

“The risk all markets face is an economic slowdown, but that’s not something that could happen overnight and so I believe Dubai’s stock market is heading towards a strong end to 2023.”