In a year like no other, the month of November is set to be one of the best ever for global markets. The next phase could increasingly support our regional markets.
Let’s start with the global context. As we write, the week that just ended added another 2% to the performance of global stocks, lifting their 2020 returns to 12%. The constructive scenario that has always been ours is now becoming consensual. Several vaccine options should be available in the coming months: the containment of the virus will be possible without restricting mobility anymore. The recovery is ahead, with the additional comfort of better political visibility after the US elections. As central banks will make sure that interest rates remain extremely low, there is simply no alternative to risk assets. Many institutional investors, who were defensively positioned, have put their cash t work in November, which explains the radical appreciation of stocks with a clear rotation towards the most cyclical segments.
The rally has been massive, but also heterogeneous. The pandemic still explains most of the performance hierarchy: leading segments are the ones which have been the less affected, whether that be sectors such as technology, or countries, such as China which avoided recession in 2020. The recent buying frenzy from institutional investors has mostly been directed towards companies they know well in US, Europe, and Japan.
We remain constructive for next year but it’s time for more selectivity. The pool of buyers is shrinking, and valuations in the Western world already price-in a significant part of the upcoming recovery. We are now slightly underweight in stocks from the developed markets, but more overweight than ever in their emerging peers.
Within this galaxy, the UAE markets look poised to benefit from the 2021 outlook. We are positive on the local bond markets for long, and the GCC has been one of the best performers of 2020 so far with an 8% gain. With regards to stocks however, we were simply neutral. While we are strong believers in the long-term story of our region and in the quality of our companies, we had favored other opportunities in the context of 2020. Indeed, the year-to-date return of the MSCI GCC Index is still slightly negative.
The good news is that 2021 should be different, and we see solid reasons for a much better risk-adjusted return for UAE stocks looking forward.
The first one is obvious for people who are lucky enough to live in the UAE: the recovery has started. The response to the pandemic has been remarkable. The death toll as a percentage of the population is 10 times better than in Europe and thanks to the coordination between public and private sectors, the economy has started to recover in an impressive way. It doesn’t require a PhD in economics to see that traffic is improving in shopping malls, that flights and hotels are being booked again by visitors from around the world, and even that real estate prices are more resilient than many expected. Firmer oil prices are another good news story for the region. The upcoming Expo and the UAE’s golden jubilee will also support activity in 2021. Although don’t get me wrong: we are not talking about hyper growth in the short-term. The economy has been hit hard by the crisis due to its sectoral composition, and our in-house growth forecast for the UAE in 2021 is close to 2%.
More importantly, 2021 is only the beginning and that is our second reason to be optimistic. The secular drivers of the UAE growth are being boosted by recent initiatives. The peace deal with Israel is already driving vibrant business and investment activity. Visas for retirement, for people employed overseas and for highly qualified post graduates, combine with the considerable attractiveness of the country as a place to live and work to further support its economy. Finally, the change to company ownership laws should provide a sustainable boost to private investment, in a country already known for its competitiveness in international benchmarks. The era which starts with an early recovery from Covid-19 should last decades, aligned with the vision of the country for the next 50 years.
The third reason is valuation. This sustainable growth is not priced-in by our stock markets. The price-earnings multiple of the Dubai DFM is at 10 times the profits expected by the consensus for 2021, and the price-to-book ratio is below 1. This compares favorably with every single developed market (the UAE has similar GDP per capita) and with most of the emerging markets (the UAE has similar growth). No doubt, our stock markets are on the right side of the current rotation, with regards to valuation but also in terms of sectors, with high quality companies in logistics and financials for example.
Value is one thing, unlocking it is another. The good news for local investors, who already appreciate and own domestic shares, is that dividends will come back. For capital appreciation, foreign inflows are the true catalyst. With more inclusion in major indices, more stability in our region, and in a world where expected returns are increasingly difficult to find, we have no doubt that smart investors around the world will gradually increase their positions. As always with investments, it is a matter of patience, but the stars look well aligned for our local stock markets in 2021 - and beyond.
Any opinions expressed in this article are the author’s own
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© Opinion 2020