The rally on the UAE stock markets is likely to be sustained with a positive outlook for 2008, leading to a 30 per cent overall gain, investment bank Shuaa Capital said yesterday. "Though this expectation is highly sensitive to our core assumptions, with risks to the upside, we expect the UAE market to witness another positive year in 2008, possibly matching the performance achieved by the market in 2007," Shuaa said in its report titled Vision 2008: UAE Equity Markets.
As a part of the market outlook, the report highlights that this success would be driven by positive valuation parameters and the likelihood of a market multiples expansion, sustained double-digit corporate earnings growth, strength and diversity of economic growth engines, the impact of continued negative real interest rates and generally positive momentum in the market.
"Our bottom up view remains positive, although slightly more guarded," Shuaa said in the report. "An important development in the market that would support such a positive scenario could be an overall deepening of the market to make it more representative of the underlying economy, and in the process opening up important but as of yet unavailable economic sectors and investment themes," it said.
The Shuaa report added that this would involve a much more active primary issuance market and a concerted effort by the regulator to ease and support the process. "Another positive development could be the overall improvement and alignment of general accessibility of the market to foreign participants," the report said.
However, the risks to Shuaa's expectation include contagion from a possible global equity markets retraction (especially now that the market has proven to be more correlated to global equities); a slowdown in foreign fund flows due to the fact that many of the most attractive shares on the market have reached their foreign shareholder limits; a potential rotation of investments out of the UAE and into Saudi Arabia and Kuwait as investment restrictions and impediments into both are eased; earnings disappointments from key market components; structural bottlenecks in the economy and resultant delays to projects; and finally creeping inflationary pressure into consumer staples and the impact of that on disposable income and savings rates.
Amongst the key developments this year, as highlighted in Shuaa's report, the domestic primary market (Dubai Financial Market and Abu Dhabi Securities Market) is set to witness significant and highly anticipated developments, including the lowering of the minimum size requirement for initial public offerings from 55 per cent of capital to 45 per cent.
Moreover, family owned businesses will be allowed to float as little as 30 per cent of their outstanding capital, with conditions for this seeming highly restrictive at this stage. Other anticipated developments may relate to the adoption of generally more liberal policies concerning public offerings, including allowing book building, less restrictive pricing mechanisms and allowing for secondary issuances (sale of existing shares) rather than just capital raising.
All the above developments have already been adopted for listings on the Dubai International Financial Exchage, as well as in the neighbouring market of Saudi Arabia.
Primary market activity and outlook
Despite witnessing an overall reduction in total number of transactions in 2007, the primary market in the UAE witnessed significant activity and important new developments, and achieved a new record in terms of total size of initial public offerings.
A total of Dh6.53 billion was raised in three public offerings in 2007, almost triple the figure recorded in 2006 despite floating only half the number of companies.
Secondary capital raising through rights issues practically disappeared in 2007, with only $45 million (Dh165m) raised compared to $1.83 billion in 2006, as listed companies digested the significant capital raised over the preceding two years.
However, a number of convertible bond offerings replaced rights issues, with two companies issuing a total of $709m in convertible bonds during the year.
The three initial public offerings were in fact the three largest IPOs to be witnessed in the country to-date. The DP World offering at $4.96bn, represented the largest offering in the Gulf and the third largest IPO of 2007 globally. It accounted for 76 per cent of total funds raised in the UAE through public offerings for the year.
While it was the only new offering to list on the DIFX, all three offerings were listed in Dubai, with the other two companies listing on the DFM. Appetite for offerings remained high, with all three offerings being oversubscribed, however there was an absence of overly inflated subscription levels, as banks tightened their IPO funding activities.
While DP World was the only outright privatisation, all three companies retained a component of either direct or indirect government ownership. Meanwhile, the core market drivers for 2008, according to the report, will include the following:
Earnings growth: Given Shuaa's anticipated aggregate earnings growth of 18 per cent for 2008, the market would have to appreciate by about 35 per cent to reach the higher end of the earnings multiple range by the end of the year.
Positive momentum and hype: A confluence of headline grabbing economic growth rates, record oil prices, globally expanding and highly acquisitive companies and significantly increasing global exposure of the market, at a time of fears of slowdown in global growth rates, and faltering conventional emerging markets may prove to be among the most important drivers of fund flows into the UAE market in 2008.
Negative real interest rate impact: The recent decline in domestic interest rates, on the back of a more expansionary monetary policy adopted by the United States Federal Reserve, has resulted in very significant negative real interest rate environment in the UAE. This will prove to be highly conducive to inflation in equity prices for 2008.
In addition to the direct impact on equity prices, the low interest rate environment will lower borrowing costs of corporates during a period of generally high capital expenditure. Impact on profitability will also stem from general asset price inflation induced by negative interest rates, as many companies in the UAE remain exposed to asset prices.
Economic engines: The increasing diversity of economic drivers in the market is proving to be a key factor, as government and private sector participation in the growth is equally evident. Growth capital expenditure by corporates, together with growing infrastructure spending by the state has given the economy a duality of drivers, with a clear direct impact on corporate performance.
Issuance outlook for 2008
Among other developments, the initiation of what seems to be a privatisation programme in Dubai, should bode well for the primary market in the UAE for 2008, Shuaa said, adding that it anticipates a significant increase in the number of offerings for the year, possibly exceeding 10, across all three exchanges and including both privatisations and private company offerings.
"The total size of offerings should approach levels raised in 2007, although individual offering sizes are likely to be smaller. Also, a number of the listings will be from sectors that are either not represented currently in the market, or significantly underrepresented, included construction and engineering, retail, consumer, hospitality and infrastructure companies," Shuaa said in the report.
Banking sector review
The UAE banking sector crossed Dh1 trillion in total assets for the first time as of September 2007, ranking it first in the Gulf Co-operation Council ahead of the Saudi Arabian banking sector, according to Shuaa's report. In 2007, of the 46 banks operating in the UAE, 25 were foreign banks.
A major event impacting the industry was the creation of a domestic banking champion following the merger of National Bank of Dubai and Emirates Bank International to create Emirates NBD. Apart from conventional commercial banks, five Islamic banks operate in the market now, excluding the newly established Noor Islamic Bank (Islamic banking subsidiary of Dubai Holding which started operations in this month with a network of six branches in Dubai) and Al Hilal Islamic Bank established in October 2007 in Abu Dhabi.
Real estate sector review
Dubai is expected to see supply of almost 56,000 new units in 2008, according to the Shuaa report, followed by about 60,000 in 2009. In 2010, the bank expects about 37,000 units to be delivered.
This would result in a total of 153,000 units over the next three years, taking into account potential delays. Around 40-50 per cent of planned supply is missing the target by roughly 12 months, Shuaa said in its report, adding that the bank has assumed that 50 per cent of planned supply will miss by 12 months in 2008, decreasing to 30 per cent in 2010.
It further states that as investment in supply and demand for real estate continued to expand, Abu Dhabi has emerged as a leading market. And while Dubai is anticipated to move into a stabilisation mode with easing prices targeting the high-end apartments segment, Abu Dhabi is shifting into full acceleration, the report highlighted.
Average property prices, meanwhile, in Dubai, are estimated to have increased by around 15-20 per cent in 2007, whereas properties in Abu Dhabi are being launched in the range of Dh12,000-20,000 per square metre. "Property prices have reached new highs with downtown Dubai properties selling in the range of Dh25,000-30,000 per square metre, up about 30 per cent over the last 12 months," Shuaa said in the report.
Telecoms sector review
With du entering the market and breaking etisalat's monopoly, the federal act that originally formalised etisalat's monopoly will have to be revised, according to Shuaa's projections, including the clauses related to royalty fee and foreign ownership. "These two developments are highly anticipated for 2008, and should have significant implications for etisalt in particular," the bank said.
Meanwhile, the telecommunications market in the UAE for 2007 is expected to be worth Dh21.54bn in terms of total revenues versus Dh16.29bn in 2006, recording a 32 per cent year-on-year increase.
And the total number of subscribers reached seven million in the third quarter of 2007 recording a 34 per cent increase year-on-year. With regards to the VoIP (voice over internet protocol) facility, which is currently illegal in the country, Shuaa is of the view that the ban will remain in place this year as well, as the operators are not ready to give up the huge revenue stream generated from international voice traffic.
Moreover, in June 2007 the TRA reiterated that the provision of VoIP services will remain the exclusive domain of etisalat and du.
However, the UAE's target deadline to fully liberalise the telecommunications sector is 2015. "By that time we expect the government to have issued ISP licences, implemented complete mobile number portability, licensed VoIP providers and introduced a new operator. But there is still a long way to go," the Shuaa report said.
UAE stock market rally to boost economy in 2008