Dubai Government bonds and credit default swaps (CDS) remain recommended investment options, says investment firm Nomura International.
"Market pricing of Dubai's sovereign risk does not reflect current fundamentals in our opinion, and we therefore recommend exposure either through CDS or government bonds," Ann Wyman, Nomura's Managing Director and Head of Emerging Markets Research, Europe, wrote in a report.
Dubai Government CDS rates have declined by more than 35 per cent to 418 basis points since mid-February, when they were at around 652 basis points, according to CMA DataVision's Sovereign Risk Monitor.
Analysts at Nomura International highlight that there remains a "pricing error" in both Dubai and Abu Dhabi's CDS spread.
"We also can use our fiscal scorecard to evaluate the relative 'pricing error' of both Abu Dhabi and Dubai CDS spreads. The results show that both credits trade wide of others with comparable fundamentals," the report said.
"Perhaps one of the biggest unknowns going into the [Dubai World] restructuring was the potential treatment of bondholders. As such, the indication that Nakheel 2010 and 2011 holders would be paid in full, and on time, was understandably taken as a positive sign by the markets, with subsequent meaningful rallies in both corporate bonds and sovereign CDS.
"Looking ahead, this favourable treatment for bondholders should, on balance, provide support for both market access and pricing of future debt capital markets transactions," Wyman wrote.
"The successful Dubai Electricity and Water Authority new issue should help sentiment, indicating a renewed appetite for quasi-sovereign risk in Dubai."
Nomura said external debt spreads have narrowed on most of the region's sovereign debt, while they still remain wide for Dubai.
"We continue to see value in both Dubai Government bonds and CDS, particularly in the wake of the announced restructuring proposal for Dubai World and recent indications of renewed market appetite for quasi-sovereign issuers," Wyman wrote in the report.
"Credit quality for the UAE as a whole is very high. While it is true that the country's vulnerability to the outlook for oil prices can introduce some volatility to future economic performance (in terms of yearly GDP growth), its high per capita GDP (more than $35,000), extensive hydrocarbon reserves and offshore financial assets all provide a considerable buffer," the report said.