(MENAFN - Khaleej Times) The UAE's bourses are set to usher in a new era this year with the inclusion in emerging market indices compiled by MSCI and S&P Dow Jones. The foreign investment inflows, positive economic indicators and strong rebound in real estate and possible integration of the DFM and ADX are expected to push the equities to new peaks this year.
Today, on the first trading day of 2014, markets will start on high note and further strengthen the 2013 gains, as the region has become a mainstream destination for international funds. The upbeat investors are ready to inject funds worth millions of dollars in the emirate's equity markets that will extend the bull-run and improve trading volume on the two exchanges.
Analysts and market insiders believe the UAE stocks will remain bullish throughout the year, but the gains will not match the 2013 growth due to higher valuations of scrips. They expect a slower growth and profit-taking in key shares, but have consensus that bourses will extend this bull run.
The Dubai Financial Market's General Index, which is the second best performer in 2013 with 108 per cent gains, is trading more than 15 times of 2013 earnings. The best performing bourse in Middle East and North Africa still has room to extend 2013 rally into new year to incorporate gains from emerging market status, booming property sector, flourishing tourism industry, brighter outlook for corporate earnings and hosting of World Expo 2020. Abu Dhabi market also surged 72.85 per cent in 2013 and will further advance to mark another remarkable year.
The UAE and Qatar - which is also upgraded to emerging market - are expected to see approximately 8 billion of investment inflows into various sectors of the two nations over a period of time. The Qatar market, which rose 31.01 per cent with a market capitalisation of 338.39 billion last year, is also expected to reap the benefits of positive economic indicators, massive spending on infrastructure projects and inclusion in MSCI index.
Global emerging market funds control around 1 trillion and the UAE and Qatar will together account for approximately 0.80 per cent of the MSCI Emerging Market Index. Assuming that emerging market funds allocate to benchmark weighting, the math works out to be roughly 8 billion of new flows to both the UAE and Qatar. The market capitalisation of the UAE and Qatar combined is about 338 billion so the 8 billion represents approximately a 2.5 per cent inflow," Al Masah Capital Management chief executive Shailesh Dash told Khaleej Times.
He said the main sectors for the UAE are expected to be real estate, banking, financials, and transportation while in Qatar banking, chemicals, real estate, shipping, telecom and utilities would dominate the trading and attract maximum foreign investment inflows this year.
Saleem Khokhar, head of equities at National Bank of Abu Dhabi's Asset Management Group, said 2013 was a great year for both DFM and ADX.
"Both markets remained strong throughout the year, but DFM put in exceptional performance. Many factors - MSCI upgrade to emerging market status, resurgent property prices and Expo 2020, among others - contributed to this remarkable growth. At the start of 2013, UAE markets were extremely undervalued and have now rerated," he said, adding that financials and real estate sectors were the dominant players in 2013 with a number of stocks rising by more than 100 per cent.
Union Properties and Dubai Investments - both led by UAE's prominent corporate figure Khalid bin Kalban - remained on top two positions at DFM with 201.26 per cent and 192.25 per cent growth in shares value last year. Emirates NBD, Dubai Islamic Bank, Dubai Financial Market, Emaar and Deyaar Development, among others, surged by more than 100 per cent of their value last year.
"2014 is expected to be another good year, though we should not expect a repeat of 2013. Solid gains should be continued and equities are likely to receive more investment inflows from local and international investors," Khokhar said.
Echoing similar views, another stock analyst said 2013 was the third best year for DFM after 2004 and 2005.
"The DFM surged more than 100 per cent and was best performing Mena market last year. The ADX, which is home to more blue-chip companies like etisalat and National Bank of Abu Dhabi, rose about 73 per cent in 2013," Reda Gomma, portfolio manager - Asset Management at Mashreq, told Khaleej Times.
"Banks and real estate have dominated trade due to their strong presence in the index. Next year, we're likely to continue to see markets run up, but not to the same degree especially in anticipation of official MSCI additions."
Khokhar said challenges for 2014 are likely to be of a global nature rather UAE specific. Quantitative easing tapering and China trade data should be closely monitored.
Dash said the main challenge in 2014 would be that of sustained price appreciation, as all GCC markets have seen stellar performances last year.
"Valuations are not as cheap as they started the year with and it's likely that 2014 will continue to display a strong showing, but albeit at a slightly more muted pace. Stock selection and dynamic market entry and exit points will become more essential," he said.
Gomma said clamping down on real estate would be one of the key challenges in 2014.
"Apart from Dubai's 27 billion debt level due in 2014, which is a challenge but should be non-issue as the emirate will be able to finance given the improvement in the economy and also the availability of liquidity in the global markets."I believe one of the most important goals is clamping down on real estate. This becomes more of a direct concern following the Expo 2020 win as in previous years leading to the real estate crash, prices went up too far and too fast."
Dash said integration of UAE bourses is possible this year and it would be a step in right direction to attract more investments.
"Yes, the DFM and the ADX should make some good progress on their merger plans in 2014 and this would definitely be a positive for the country as a whole as it would reduce the regulatory and administrative burden on investors by only dealing with one exchange."
It is also possible that the country may alter some of the rules to be more competitive for new listings such as reducing the free float requirements as not all companies that want to go public are willing to give up more than half of the shareholding, he said.