UAE investments: adopt a 'wait and see' strategy in a bear market
The UAE boasts one of the most diversified economies in the region. (File photo)
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The current financial carnage in world markets in currency, commodities and stocks, coupled with the China debacle, are only bringing one question to the minds of UAE investors, and that is "what next?"
Leading analysts contacted by Khaleej Times reveal that it is best to 'wait and watch' as the scenario could surely purge best buys, and will require smart strategy to pick selective stocks.
Dr R. Seetharaman, group CEO of Doha Bank, said: "GCC economies, including the UAE, are insulated but not isolated from global economies. Any significant and persistent fall in oil price or any global financial meltdown can impact the UAE in the near term. However, the fundamentals of the economy are strong, with a clear vision and a concerted action and hence economic revival can happen soon. Even during the global financial crisis we saw the UAE government and central bank taking actions to protect financial stability."
The UAE, one of the most diversified economies of the region, ranks favourably on competitiveness indicators. Non-oil growth is expected to slow to 3.4 per cent in 2015 from 4.8 per cent in 2014. However, structural reforms should aim at further diversifying the economy and accelerating private sector-led job creation for nationals. Such reforms include further opening up foreign direct investment, transitioning toward a knowledge-based economy, easing access to finance for startups and SMEs, and creating the right incentives for entrepreneurship and job creation. Seetharaman said: "There are two challenges impacting GCC Capital markets. One is the fall in oil price, and another is concerns from the Chinese economy. These two challenges have created a bearish sentiment in the region, even though there could be some relief rallies in between. The UAE economy, along with other GCC economies, had faced the challenge of low oil prices since the middle of last year, however some relief was seen in oil prices in the second quarter of this year, which again got erased in third quarter."
"The concerns about the Chinese economy are hurting commodity prices and GCC stocks related to resources and global demand, such as steel and petrochemicals. China is the leading contributor to both global growth and global trade. The slowdown in Chinese economy may impact its trade with the UAE as well. I would advise the investors in the UAE to be in a wait and watch mode, and look for more developments from China," added Seetharaman.
Echoing similar sentiments, M.R. Raghu, senior vice president for research at Markaz, said: "The UAE is well placed to withstand the lower oil environment and the current negative sentiments prevailing over Chinese growth. With ample reserves, stable leadership and a diversified economic base, the UAE's economic growth would be sustained. The market valuations in the UAE remain moderate and Dubai and Abu Dhabi indices trade at a trailing P/E of 10 and offer healthy dividend yields. The UAE long-term outlook remains intact and the recent fall in markets should be utilised by investors and selective stocks could be added to their portfolios."
Markaz's recently released earnings report for the first half of 2015, indicates earnings in the UAE contracted by two per cent in the first half of 2015, as compared with the same period a year ago. Also, the pressure on oil markets, its resultant impact on the business cycle and corporate earnings would be largely felt in the coming quarters.
Though on the positive side, valuations in the UAE remain moderate. Going forward, rather than a pure index strategy, investors who have the ability to pick stocks would emerge as winners. Among the GCC nations, the UAE has done well to diversify its economy and emerge as a center for trade for the entire region including sub-Saharan Africa. Given the ample fiscal reserves accumulated, when oil prices were over $100 barrel, the government should accelerate their efforts to remove subsidies and sustain their spending in key areas such as developing their infrastructure and human capital.
Any significant correction can be taken as opportunity to invest for long term in those sectors which contribute to UAE non-hydrocarbon diversification, concluded Seetharaman.
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