Arab unrest and global financial outlook leave Dubai the world’s cheapest bourse

Ironically for a city where the vast majority of the population is non-Arab, the unrest across the Middle East and North Africa has left the Dubai Financial Market the cheapest stock market in the world as a report on Bloomberg noted today.

It is mainly fear over the outlook for global equities as an asset class that is keeping the bargain hunters from moving into the DFM, hedge fund managers told ArabianMoney at their annual meeting in Dubai. Indeed, since mid-January it seems everybody has been moving capital out of the MENA region and into safe havens.

World’s cheapest bourse

The DFM has fallen 13 per cent in value this year and trades at just 0.6 times book value and a forward price-to-earnings ratio of just 5.7 compared with the S&P at 24. The DFM’s average dividend yield is 4.1 per cent, almost double the yield on the MSCI Emerging Markets Index.

It is an astonishing fall from grace. In 2005 the DFM was the world’s best performing stock market. Then it crashed in 2006, two years before the property crash in Dubai, and the debt crisis of December 2009.

Dubai announced last autumn that it had reached a deal with its creditors over a $24.9 billion debt mountain at Dubai World, the state-owned conglomerate. But this deal has still not been signed off and this has not been good for confidence in the emirate’s future.

That issue apart, trade and tourism have recovered strongly this year. Trade is back to pre-2008 levels while hotels have filled up due to the exodus from Egypt. Business confidence is at its highest since the global financial crisis. Emirates Airline just overtook Lufthansa as having the most capacity as the world’s third largest carrier, and Dubai’s airport just pipped Frankfurt in passenger numbers.

No unrest

Fears of contagion from the wider MENA region are ridiculous. Dubai is 95 per cent expatriate and has almost no unemployment. And even inflation is very low due to falling housing rents. There is pretty much nobody to protest and no reason for them to do so.

In fact, Dubai stands to benefit from financial institutions quitting protest-torn Bahrain in the near future, and relocating to the gleaming new towers of the Dubai International Financial Centre. Dubai will also win business orders as regional governments raise spending to counter unrest and these orders pass through the local ports.

But the final sword of damoceles still hanging over Dubai is the threat of another global financial crisis, brought on by higher oil prices caused by Arab unrest. Once this is over, or fails to happen the DFM has a great deal of upside. The ArabianMoney newsletter’s next issue will examine the best way to invest in this market (click here).