Emaar buyback not the only reason to buy the DFM

Posted on 14 September 2008 with no comments from readers

News that Emaar Properties, by far the largest component of the Dubai Financial Market is to start buying back its shares from October 1st should mark a turning point for the local bourse this week.

It might seem a little brave to be talking about buying UAE stocks with the indexes plumbing 11-month lows. But the DFM is almost exactly back to where it was a year ago, before the last post-Ramadan rally. There could, of course still be a final sell off before we hit the bottom for this year, particularly if Wall Street has a rough ride next week on financial sector failures.

Will it be any different this time for the DFM? I do not think so. The US financial crisis continues but with the presidential election in progress all the stops are being pulled out to keep the show on the road.

Commentators like Dr Marc Faber say the level of manipulation and intervention is on a bigger scale than anything he can remember in his long career. That makes markets exceptionally difficult to call in the medium term, but short term the US establishment should be able to keep the ball rolling.

At the same time, oil prices may have reached their new base at $100 a barrel, with Opec trimming output and numerous factors from hurricanes to geopolitics still supporting prices. This gives the UAE a daily income of Dh913m or an annual rake of Dh332bn, compared with the federal budget of around Dh100bn.

So my point would simply be that UAE stock market investors have overdone their pessimism over the summer – just as they did last year – and as Ramadan concludes the market is likely to resume its rally. There are plenty of reasons to be optimistic about the local economy quite apart from the oil price which remains very high by historic standards.

Just to pick one example. Last week a columnist in Emirates Business alluded to the importance of developing the mortgage market in the UAE so that the supply of new property coming on to the market over the next few years can be financed.

While I might question the figure of 183,000 new units due for delivery over the next three years, taken from a Prime Group report, and wonder about delays and cancelled projects, nonetheless the fact remains that the mortgage business growth in the UAE is going to be phenomenal, if not perhaps the suggested five-fold surge from current levels.

This is both a challenge to local banks and a huge opportunity. How many countries in the world are presenting their banking sector with such an opportunity – particularly since the sub prime lending crisis erupted?

In many industrialized countries home loans are the biggest contributor to bank profits. Why should it be any different in the UAE in the near future, given the enormous expansion of real estate and market reforms that allow foreign ownership?

I can think of no better argument for buying UAE banking stocks – and indeed those of other GCC countries where mortgages are also going to become big business like Qatar. Local banks have prospered well in the Oil Boom and grown their profits on the back of traditional business lines like credit cards and personal loans.

But perhaps those investors who shy away from the domestic banks because of their exposure to real estate should actually be buying these stocks for exactly the same reason. Yes, we all know that banks are exposed in lending to developers and could find themselves with some bad loans as the housing boom matures, and a few over stretched development companies come to light.

However, a well run bank – and the UAE banking sector is well regulated with a 20 per cent maximum cap on exposure to real estate – will have its loan book in good order. Is not the far bigger consideration the future profits to be generated from creating and developing mortgage lending in the UAE?

I am sure the banks will come up with a solution to the size of this problem. The figure quoted last week of Dh290bn for the next three years of mortgages is not beyond the innovative energy of the UAE banks. Indeed, to put that sum into perspective, the GCC stock markets have lost that much in value in the last two weeks.

Is this not a classic stock market buying opportunity? The banking sector has been heavily written down over fears of a real estate slowdown, of which incidentally there is absolutely no sign. Prices are still going up. But stock market investors are focusing on the downside and ignoring a great new source of profits just around the corner.

Buying stocks in solid regional and local banks, as well as the specialist mortgage companies Amlak Finance and Tamweel, in a depressed market is both a short and long term opportunity, and I doubt whether it will be very long now before the big local investors snap up these shares, even if foreigners are a bit late to the party as usual.