Why foreign hot money is about to return to the UAE

News that foreign banks cut their deposits in the UAE to the lowest in four years in the first half of 2010 could indicate a climax in asset sales that means all the sellers are now out of the market, and that the time of maximum pessimism is now passing in favor of a new bull market for local equities.

It is a perversion of stock markets that the best time to buy is when things look worst and equity prices are therefore at their lowest levels. By this summer all the sellers had probably gone, marking a true market bottom. That said a sudden reversal in global financial markets now would likely send local stocks back to those levels.

Foreigners cash-out

Figures from the UAE Central Bank show that foreign banks withdrew $33 billion in the 18 months covering the crisis period through 2009 up to summer this year. These deposits hit an all-time high of $57 billion at the end of April 2008 due to currency revaluation speculation, the real estate boom and more bouyant stock market.

The rush to withdraw this so-called hot money started when the UAE withdrew from plans for a single regional currency and gathered pace after the ’sudden stop’ in the UAE economy during the global financial crisis in September 2008.

However, a sharp increase in deposits by local individuals with the 23 national and 28 foreign banks has actually boosted the total amount of savings to $268 billion, higher than before the crisis. This comfortably covers the estimated $109 billion owed by Dubai Government related entities post-crisis and more besides.

This underlines the financial stability of the UAE, which is not so surprising for one of the world’s largest energy exporters. But this is often forgotten in the superficial analysis by foreigners who do not know the country, let alone bother to look at its balance sheet.

It is certainly very likely that at least some of the hot money that left in the financial crisis will begin to come back. UAE share valuations are relatively cheap on many measures and the growth outlook is surely a reversion to the high long-term rates of the recent past in the medium term.

Back to basics

Let us not forget from our share picking basics that the key to long term performance by stocks is the underlying growth rate of the economy in which they are based. The power of compounding ensures that even a small extra amount of annual growth will pay off in much higher capital growth in later years.

Perhaps a US stock market sell off in October will take local stocks down again, or they may carry on up. But actually a US downturn might be just what it takes to remind investors that emerging markets are a better long term prospect, and that includes the UAE whose share prices are still relatively cheap.

It is surely about time investors began to look at the UAE bourse as a long-term opportunity and not just a place to gamble on the daily movement of stocks with as much chance of winning as in a casino. As everybody knows you always lose money in a casino unless you happen to own it.