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29 March 2024

Markets need structural change to woo investors

A breakdown showed 30 companies which have announced results for the third quarter are listed on Abu Dhabi’s stock exchange. (FILE)

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By Sunil Kumar Singh

Despite having the lowest price-to-earnings (P/E) ratio, and hence being the cheapest in the GCC, the UAE stock markets have seen turnover as well as volume of traded shares going down.

However, a lot of it could change if there is a major reversal in the fundamentals of these markets that would pull back investors and trigger a sustainable rally, market analysts have said.

“The key reason why these markets are cheap is that they are dominated by two sectors -- real estate and financial sectors, which are going through the downturn phase,” Fadi Al Said, Senior Investment Manager & Head of MENA Equities, ING Investment Management, Middle East told Emirates 24|7.

Historically, real estate and the financial sectors trade at a discount and at low multiples due to the fact that these businesses are cyclical in nature. Additionally, since both these sectors are interconnected, it puts a cumulative dampening pressure on the overall market sentiment, he said.

Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) currently have the lowest P/E ratio of 9 compared to their GCC peers. Saudi Arabia currently is the most expensive market with P/E ratio of around 15; Kuwait has 14, Oman and Bahrain 11, and Qatar at 10.

“The structural factors that would reverse the market trend are those that have a positive impact on the real estate and the banking sector.

This includes more activities in the real estate sector, stabilisation of property prices, and improvement in the demand and supply dynamics. For banking sector the structural change would include cleaning up the balance sheets. Without setting their past to order these sectors won't be able to have a clear direction to follow in the future,” he said.

According to the latest monthly trading data available on DFM, real estate and construction sector, and banking and financial services together account for more than three-fourth of the value of traded shares on DFM.

Banks and real estate sectors also constitute around half of the total market capitalisation on DFM. The banking sector’s share in the total market cap stands at around 25 per cent (the largest single sector), while real estate accounts for around 18 per cent of the total market cap on DFM, data by DFM show.

“DFM and ADX are trading at a discount compared to other markets and are indeed cheap, but the real issue is that they lack any catalyst that can move up the investors' sentiments. When volumes drop, sentiments is not encouraging and valuations are very low, all what the market needs is a catalyst or at least a hint that there is light at the end of the tunnel,” he said.

According to Shiv Prakash, Senior Technical Analyst at MAC Capital Advisors: “Just a low P/E is not a correct indication for an investor to invest in the markets. Extreme low P/E also indicates a slow growth for that company.”

Currently, the stocks listed on DFM and ADX have a low P/E ratio based on the slower growth expected in the short to medium term. Low P/E also does not indicate low risk. The stock has a low P/E because the earnings are on decline. In that scenario the low P/E does not indicate that the stock is a value stock or an undervalued investment opportunity,” he said.

“Those who would like to invest for at least two or three years time frame should first analyse the growth prospect of that selected stock with its near term expansion plans. Only then the investment can be rewarding,” he added.