2015 was an "annus horribilis" for GCC equities thanks to the 60 per cent fall in crude oil prices $360 billion in lost petrocurrency revenues tighter liquidity in the money markets rising budget deficits imported deflation due to the higher dollar and multiple civil wars in the Arab world. UAE equities have fallen 25 per cent in the past year even though this $400 billion economy is easily the most diversified and networked in the Middle East with oil now only one third of GDP down from 90 per cent in the 1970's. Abu Dhabi also amassed $2.5 trillion in sovereign wealth fund assets in the four decade since the establishment of the Abu Dhabi Investment Authority (Adia) in 1976. Saudi Arabia's refusal to play the role of Opec's swing producer the highest Russian production since the fall of the USSR a boost in Iraqi West African and Mexican output and a demand shock from China means Brent crude could well fall below $40 by mid 2016. Yet I believe some UAE equities now offer compelling fundamental value.

The UAE faces no recession risk in 2016 though the IMF has slashed its growth forecast to three per cent. UAE banks will face higher funding costs and an ugly credit cycle as the property slump deepens and world trade shrinks. The banking system has boosted its Basel Tier One capital cushion by 500 basis points to 15.7 per cent since Lehman's failure and prudent UAE Central Bank regulations have led to a fall in the loan/deposit ratio from 107 on the eve of the last credit crunch to 97 now. Without a systemic banking crisis I see no reason for blue chips like Emaar Properties to fall 50 per cent from their summer 2014 peaks. The pendulum of greed and fear in the UAE stock markets has swung towards irrational fear "Buy when there is blood on the street" was Lord Rothschild's credo as he accumulated shares in London on the eve of the battle of Waterloo. Value like beauty is in the eyes of the beholder (investor?).

Saudi Arabia's All Tadawul Share Index (Tasi) trades at 14.8 times earnings and two times book value even though oil is 85 per cent of the kingdom's government revenues and its budget break even price of Brent has risen from $40 in 2007 to $100 now. This is a significant premium to the UAE stock indices which trade at a mere 12.5 times forward earnings and a 1.3 times book value. While I concede that Saudi equities are overvalued and the Tasi has at least 20 per cent downside risk UAE equities are cheap by any rational valuation criteria relative to the country's sovereign banking and earnings growth metrics. Mexico trades at 20 times and Indonesia at 15 times earnings. I believe their macro risks are no worse than the UAE. In fact au contraire!

I concede that historical correlations between the Dubai/Abu Dhabi indices and crude oil spike when oil prices plunge as happened in 1999 2008 and 2014-15. Yet the UAE economy of late 2015 is the Arab world's financial logistics aviation and tourism hub with a far lesser exposure to the oil shock than Saudi Arabia Qatar Oman or Kuwait. The UAE has emerged as the safe haven banking system of the wider Middle East and the trading hub of Africa/Central Asia. The dividend yield of the UAE is 5.2 per cent among the highest in the world. There is zero devaluation risk in the UAE dirham unlike the petrocurrencies of Russia Norway Australia Canada Malaysia Mexico and Columbia. While Saudi Arabia must bear the costs of $53 billion in fuel subsidies the UAE has abolished its subsidies. The financial markets have priced in a recession scenario for UAE equities that will just not happen in 2016.

Emaar Properties remains my favourite blue chip in the UAE. This is no longer just a property developer but the owner of some of the Arab world's most valuable shopping malls and hotel assets. Emaar has slashed net debt on its balance sheet. Emaar Malls and Emaar Misr have been listed. Operating margins have almost doubled in the last five years. Emaar deserves a higher valuation multiple than 12.5 and 1.2 times book value since it has presold 95 per cent of its delivery commitments at property market peaks last summer and derives more than a third of its bottom line from high margin recurrent revenue businesses like leasing and hotels. While property prices will not bottom in 2016 Emaar at Dh6 well could.