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UAE equities see promising trajectory in the coming quarters

Increasing foreign ownership limits, hike in expatriate investors and favorable macroeconomics boost GCC equity values.

UAE equities see promising trajectory in the coming quarters

The Abu Dhabi Securities Exchange experienced a surge in listed companies raising foreign ownership limits and an increase in non-UAE nationals trading on the exchange.

In the first half of the year, three listed companies raised foreign ownership limits to 49% and one increased to 40%, representing AED 6.3bn ($1.7bn). As a result, 55 companies on ADX are currently accessible to foreign investors, representing 80% of the total exchange.

Currently holding a market capitalization of around AED 607bn ($165bn), trading activity in the first half declined with total trading value for the period recorded at AED 40.7bn ($11bn) compared to AED 54.7bn in 2019.

Commenting on the drop, Vijay Valecha, CIO of Century Financial said, ‘The ADX has large companies and in terms of quality, they are comparable to the best in the world.

‘The lack of an equity investment culture in UAE means that many of them suffer from low valuation. This is a national loss and it is imperative that more foreign investment is attracted to boost the capital flows to the country,’ he said.

The increment in foreign ownership limit bodes well for the exchange. Nevertheless, the effort to attract foreign investment should also be accompanied by more corporate governance reforms to increase transparency, said Valecha.

‘The exchange should also avail of market makers to increase liquidity for at least the blue-chip companies. Many a times, foreign investors will come only if there is liquidity, they need to have the confidence of easy entry and exit.’

The ADX also saw increased levels of interest from the expatriate investment community, with a 25% increase in the number of non-UAE nationals registering to invest in ADX compared to the first half of 2019. This demonstrates the growing levels of awareness in investment opportunities available on the exchange.

During the period, the exchange recorded 1,723 new investors—226 institutional and 1,497 individual/retail--of whom more than half (53%) were non-UAE nationals. The number of non-UAE nationals who acquired an investor number in the ADX increased by 25% compared to the first half of 2019.

The largest proportion of expatriate investors by country were from the UK, who traded AED 5.2nb ($1.4bn) in shares, followed by those from the US with AED 4.1bn ($1.1bn) and Luxembourg with AED 1.2bn ($0.33bn).

‘In recent years, the UAE has become a part of international indices such as MSCI and Russel that has helped drive a lot of investor interest in the region. Not to be forgotten is the Aramco IPO which received a lot of media attention and acted as a free advertisement for GCC stock markets’ Valecha explained.

For many international investors, GCC equities, especially UAE’s act like a proxy for the global economy. Century Financial expects inflows to come into banking, telecom and energy sectors as there are large companies that have good macro plays in the UAE economy, such as the UAE banking sector that is currently witnessing a spike in consolidation activity leading to the creation of regional financial giants. Companies like these are particularly interesting to international institutional investors and funds.

‘With a coronavirus vaccine expected in the next few months, sectors that will benefit from the reopening of the economy will be interesting. Energy, airlines, hospitality, and travel are some of the sectors investors should pay attention,’ Valecha said.

Coronavirus has inevitably created unprecedented volatility which will heighten over the next few months due to the US elections as well as pandemic-related uncertainty. He expects this to provide a boost for trading income in the coming quarters.

‘The expected arrival of a vaccine should boost global energy consumption and support GCC economies. Moreover, the injection of trillions of dollars’ worth of liquidity into the system from the US Federal Reserve, the European Central Bank, and the Bank of Japan also mean that there is a lot of liquidity floating around chasing returns. Analysts also expect the US dollar to weaken in the coming years due to the Fed’s monetary policy, which is also good for GCC equities.’

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