June 13, 2017 / 10:55 AM / 3 years ago

MIDEAST MONEY-Property, minority holders keep Dubai stocks down despite positives

    * Dubai is worst-performing big bourse in region, apart from
    * Economy is strong, valuations low
    * But heavy exposure to real estate is dampening market
    * Some disappointed shareholders withdraw from market
    * M&A, raising foreign limits may spark market

    By Celine Aswad
    DUBAI, June 13 (Reuters) - Stocks are cheap and the economy
is booming, but Dubai's equity market may not recover from a
severe slump until it has overcome two weaknesses: its exposure
to weak property prices, and gloom among minority shareholders
who have little say in listed firms.
    With the exception of Qatar, which has plunged this
month because of the embargo imposed on it by other Arab states,
Dubai has been the worst-performing major stock market
in the Middle East over the past 12 months.
    Its index is up only 2.7 percent from a year ago,
underperforming markets such as Kuwait, which is up 24.9
percent, and even Saudi Arabia, which has been hit hard
by low oil prices but is still 3.8 percent higher.
    It is far behind MSCI's emerging market index,
which is up 18.6 percent over the past 12 months.
    That has surprised many fund managers and proved costly for
some. Dubai is one of the Middle Eastern markets most exposed to
foreign funds and it is in MSCI's emerging market index,
suggesting it should benefit from the strength of emerging
markets globally.
    In contrast to much of the rest of the Middle East, Dubai's
economy is growing strongly; with big tourism, foreign trade and
light manufacturing sectors, it is more diverse and less
vulnerable to low oil prices than other Gulf states such as
Saudi Arabia.
    And Dubai is looking cheap. Its market is trading at about
9.6 times projected corporate earnings for the next 12 months,
compared to 13.9 times for Saudi Arabia and 12.9 times for MSCI
emerging market stocks, Thomson Reuters data shows.
    But all of these factors are being outweighed by Dubai's
heavy exposure to its real estate sector and by sharp losses in
a few high-profile stocks, which have driven some investors out
of the market, fund managers say.
    “The over-dependence of the economy on real estate - which
is softening - and the exposure of banks to that sector has left
institutional funds with little reason to rotate aggressively
into that market,” said Talal Samhouri, head of asset management
at Doha-based Amwal Capital.
    Real estate firms and banks, whose loan quality depends
greatly on real estate prices, dominate Dubai's bourse,
accounting for almost two-fifths of its $81 billion
    Residential real estate prices have been soft for a couple
of years and while some analysts say a recovery could begin next
year, the strength of any rebound is in doubt as the prospect of
fresh supply weighs on prices.
    Last week Dubai's top real estate developer, Emaar
Properties, tried to lift the gloom by announcing it
would offer a stake in its local real estate unit to the public
and use the proceeds to distribute a dividend to shareholders.
    That announcement has lifted the Dubai index by about 3
percent, but another issue overhangs the market: the poor
performance of several high-profile companies such as builders
Arabtec and Drake & Scull (DSI).
    Arabtec shares have plunged 42 percent this year and DSI has
lost as much as 31 percent. Both companies have embarked on
complex capital restructuring plans involving steps such as
share cancellations, rights issues and outside investment.
    Minority shareholders have lost heavily and have been forced
to guess about financial plans for their companies. This has
pushed some disappointed investors out of the stock market,
shrinking liquidity and therefore making the market less
attractive to fund managers.
    Daily trading volumes in Dubai over the last three months
have been roughly half the levels seen in previous months.
    “There has been a lot of complex activity in the smaller
sized companies and those actions are sparsely communicated to
the public," said one regional portfolio manager. 
    "There still needs to be a lot more transparency to build
trust between investors and the marketplace."
    Dubai has also lost liquidity to some other regional markets
this year because of special factors. A sharp rally in Kuwait
lured money there from across the region; Saudi Arabia has
attracted interest because MSCI may decide on June 20 to put
Riyadh on a list for possible upgrade to emerging market status.
    Samhouri at Amwal said that despite attractive valuations,
Dubai's market might not boom again until it found a new
catalyst, such as a wave of mergers and acquisitions, or a
decision by firms to raise curbs on foreign investment in them.
        Market         12-month forward
                       price/earnings ratio
      Dubai                 9.6
    Saudi Arabia           13.9 
    Abu Dhabi              10.5
    Egypt (EGX30)          11.8
   MSCI emerging           12.9

 (Additional reporting by Karin Strohecker in London,; Editing
by Andrew Torchia and Ed Osmond)
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