* Bond yields well below Gulf blue chip dividend yields
* This combining with valuations to boost stocks
* Off-benchmark allocations to Mideast stocks surge
* Trend may continue for some time
* Hopes that ex-dividend pull-back won't repeat
By Nadia Saleem
DUBAI, Feb 21 Most Gulf stock markets have
already risen sharply this year but for the bulls, the rally is
just beginning. Many base their optimism on a trend which they
say could last months longer: a flow of money out of bonds into
Globally, inflows into emerging market equity funds have
exceeded inflows into bond funds every week but one since early
December, according to EPFR, the funds data company. Last week,
emerging market equity funds took in additional money for the
22nd straight week.
That shift is being felt in the Gulf, where Dubai's main
stock index is up by 19 percent year-to-date, Abu
Dhabi's benchmark is up 14 percent and Qatar is 5
"Investors are seeking higher returns as opportunities in
the fixed income space are becoming scarce. Equities is one
alternative," said Ali Adou, Abu Dhabi-based portfolio manager
at investment firm The National Investor.
YIELDS BACK UP
Bond yields in the Gulf fell sharply throughout last year
without triggering any big shift of money into equities. The
yield on Dubai's $750 million, 7.75 percent bond maturing in
2020 tumbled more than 3 percentage points over
2012 to 3.83 percent.
But a key point for the markets came at the end of the year
when bond yields dropped substantially below the dividend yields
offered by major blue chip companies, dramatically worsening the
risk/reward ratio of holding bonds for many investors.
Rami Sidani, Middle East head of investment at Schroders in
Dubai, said Gulf blue chips with growth prospects were currently
offering dividend yields of around 5 to 7 percent.
Such yields are now combining with several other positive
factors to support stocks, analysts said. One factor is the
rally in global equity markets; another is relatively cheap
valuations in the Gulf, where markets are trading at around 11.5
times corporate earnings, below levels close to 15 times for
some southeast Asian markets.
Historically, the Gulf has traded at lower valuations than
many other emerging markets because geopolitical and economic
risks are perceived to be higher. But with bond yields at
rock-bottom levels, cheap valuations started to attract
"Valuations are very cheap because we came off a low base
and there's a gap to global equities," said Fadi Al Said, head
of investments at ING Investment Management in Dubai.
Regional investment bank EFG-Hermes estimated that
off-benchmark allocations of money to Middle Eastern equities
markets had reached their highest level since 2009.
Off-benchmark investments are those by funds which are not
aiming to mimick market indexes.
Any big change in the relationship between bond and dividend
yields could quickly undermine the stock markets. But Sidani
said the cash flows and business environments of companies in
the Gulf suggested their dividend outlooks would remain stable
for the next two or three years, which would help to protect
confidence in stock markets.
On the bond side, the Dubai yield has rebounded to 3.91
percent from a low of 3.51 percent hit in mid-January. But its
current level is still well below the 5-7 percent range for blue
In past years, stock markets in the United Arab Emirates and
Qatar have sometimes rallied in the first few weeks of the year
as investors bought shares in anticipation of receiving their
dividends, and then pulled back sharply when the shares have
This year, investors are hoping that inflows of funds are so
strong that major market pull-backs will not occur.
"The rally in local equities is driven by multiple sources -
local, regional and international inflows - because of
macroeconomic improvement in the UAE," said Al Said. "People are
looking at the future and expecting positive developments."
(Editing by Andrew Torchia)