UAE markets likely to see recovery in H2 of 2010

Markets in the UAE are likely to remain volatile in the first half of 2010 and recovery is expected in the latter part of this year, according to a new equity report from Mac Capital.

The report maintains that net profits of the 20 most liquid stocks in the UAE are expected to rebound 19 per cent in 2010, with de-stocking and cost-cutting cycles continuing to play out for local companies, underpinning EPS gains once top line growth resumes.

In the first quarter of this year, local indices have been subjected to steady selling pressure stemming from a lack of volume, ongoing concerns regarding regional credit quality and investors taking a wait-and-watch approach ahead of the UAE's fourth quarter earnings season, the report said.

Besides, there are also concerns regarding global valuations, which have also led to emerging market risk aversion and a short-term pullback in oil prices, translating into reduced foreigner volumes on the Dubai Financial Market and Abu Dhabi Securities Exchange during the early stages of 2010.

"In our view, DFMGI indices are likely to trade in the range of 1550 to 1700 during 1Q10," the report said. "The Dubai World debt restructuring is one of the key macro issues overhanging local equity markets, in addition to the prevailing lack of company transparency and disclosure, a likely spike in bank provisioning during 1H10 due to Central Bank directives and DW/Saad/Al Gosaibi exposures, plus a probable further decline of 10 per cent in Dubai property prices during 2010," it added.

The brokerage's investment themes for 2010 include "likely industry consolidation among smaller banks and property developers and contractors, greater DFM and Nasdaq Dubai exchange integration, and rising instances of Abu Dhabi shareholdings into Dubai-listed companies". Going forward, the markets will see recovery, Mac's analysts believe.

"We believe that local markets are likely to consolidate over the coming two quarters and provide a more attractive risk/reward opportunity set moving forward.

"Despite the lack of fresh buying, we believe that recognition is growing at 1500-1600 levels, the DFMGI index prices in a substantial amount of downside news flow and earnings risk. Supported by FY10 oil price futures trading above $75 per barrel, P/Book valuations at a strong discount to GCC and emerging market peers, plus consensus earnings forecasts predicting a 19 per cent jump in net profits for FY10.

"Potential consolidation of smaller financial and property companies is likely to be the key theme over the coming 12 months, along with potential for a rising number of stakes from Abu Dhabi-based entities into Dubai listed stocks."

The agency's top picks to outperform and provide capital gains during 2010 include DP World, Aramex, DFM, Agthia, Air Arabia, Dana Gas, Aldar, Arabtec, Emaar, du, Gulf Navigation and etisalat.

Mac Capital sees a stabilising UAE economy in 2010, with consensus estimates trending towards UAE real GDP growth of 2.3 per cent for 2010, following on from a forecast marginal decrease of 0.1 per cent during 2009.

"The UAE population rates, a key bellwether for the local economy, are likely to shrink by one to two per cent during FY10, following from a likely six to nine per cent decrease during 2009," the report said. "Overall, we expect local GDP components to stabilise during FY10, led by petrochemical exports and manufactured re-exports, domestic consumption, around $260bn worth of UAE infrastructure and property projects injecting local stimulus and some likely strengthening in the US dollar providing a cheaper import stream. The key risk to the local economy in 2010 remains that the recent credit market events led to a prolonged tightening of credit market conditions and reduction in business confidence, delaying hiring, reducing the ability of corporations to secure credit funding and crowding out SMEs in their ability to secure bank finance and drive business investment."

The report sees supportive oil prices but neutral global markets during 1H10. However, oil prices are likely to benefit the GCC economies.

Economic catalysts

Mac Capital believes that the key upside catalysts for the UAE economy and equity markets during 2010 are presented by an upswing in activity relating to the UAE's existing comparative advantages.

- Low cost labour and petrochemical costs: Diversify further into light manufacturing

- Trade hub for the Mena region: Likely to benefit from positive forecast GDP and trade growth during FY10

- Regional base: Infrastructure of DIFC, free zones and ports is already in place

- Liquidity: Current account balance as a percentage of GDP is forecast to increase to 5.2 per cent in FY10 driven by higher oil prices, in addition to $600bn-$800bn worth of Adia funds, which may act as a strong catalyst if partially deployed into local markets.

Positive developments on these fronts are likely to re-invigorate the equity cycle and flow to corporate earnings. Dubai GREs, as well as deriving earnings from within the unlisted infrastructure, property, utility and investment spaces, hold an estimated $59.5bn worth of shareholdings in local companies, in some cases generating four per cent plus cash dividend yields annually. Mac Capital also takes comfort in Abu Dhabi's willingness to support Dubai, protecting sovereignty and the dirham.


- Information from Mac Capital

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