Written by Zachary Cefaratti, Risk Officer at Dalma Capital Management Limited – a DIFC Hedge Fund Manager
www.dalmacapital.com
July 1, 2014
As of July 1st, 2014 the Dubai Financial Market General Index (DFGMI) is down 24.3% from its recent peak of 5,374.11, which was reached on May 6, 2014. Clearly, the market has corrected significantly but the question as to whether we have now entered a bear market remains debatable. Although there is no single definition, many market participants consider a correction of more than (20%) over a two month period to be a bear market. Based on this definition, it would appear superficially that DFGMI is now in a bear market.
However, the DFGMI is still up 23.33% on a year-to-date basis and up 83.1% on a y-o-y basis. From our perspective, the current downturn is simply a correction following an extremely strong period performance by the index in 2013.
We continue to believe that the underlying growth outlook for the UAE is positive. The economy continues to grow due to strength in the tourism, trade and real estate sectors. The DFGMI posted a blistering 108% increase in 2013 due to a combination of factors. However, inclusion in the Emerging Market index by MSCI was one of the primary catalysts for the strong price performance of the market as a whole.
“From our perspective, valuation levels were overextended especially in comparison to other emerging markets” notes Ryan Mahoney, portfolio manager at Dalma Capital, “Ultimately, corporate profitability and economic growth will be the key drivers of the market going forward.“
Why Valuations Matter?
We continue to believe that the outlook is positive for the DFGMI. The recent correction reflected a normalization of valuation levels. In general, we view price multiples such as the P/E ratio to be mean reverting. In a sense, valuation levels are like a pendulum. Periodically valuations levels will overshoot their historical average and conversely undershoot, but will ultimately return to their baseline level.
Observing valuation data, we can see that at the beginning of 2013 the TTM (Trailing Twelve Month) P/E ratio for the DFGMI (blue line) was far above that of the MSCI Emerging Market Index (MXEF) (grey line). However, as the DFGMI marched upward throughout 2013 and the first half of 2014 the valuation premium became excessive. The overvaluation of the DFMGI becomes even more apparent when comparing directly to the Abu Dhabi Securities Market General Index (ADSMI, orange line).
“Although a valuation premium for the DFGMI relative to the MXEF is warranted, the discrepancy became too large to be sustainable,” observes Elliot Carol, portfolio strategist at Dalma Capital, “Given the recent correction in the market, we view the DFMGI as being much more attractively valued at current levels”
What are the future prospects for the Dubai Financial Market?
The IMF is currently forecasting that the UAE will achieve 4.75% GDP growth in 2014. The growth backdrop is positive with both the tourism and hospitality sectors performing strongly. While Abu Dhabi’s economy is supported by public spending projects, Dubai’s services sector has been the main driver of the rebound.
While the performance of the DFMGI has been exceptional, the recent correction will bring valuation levels back in alignment with other emerging markets. Overall, we maintain a positive bias on the UAE economy and the DFGMI, although we did view the rapid rise of the market in 2013 and the first half of 2014 to be unsustainable from a valuation perspective. We believe the market will consolidate at current levels and expect improved corporate earnings growth to be the catalyst to drive the market higher as opposed to an expansion in valuation multiples.
www.dalmacapital.com
July 1, 2014
As of July 1st, 2014 the Dubai Financial Market General Index (DFGMI) is down 24.3% from its recent peak of 5,374.11, which was reached on May 6, 2014. Clearly, the market has corrected significantly but the question as to whether we have now entered a bear market remains debatable. Although there is no single definition, many market participants consider a correction of more than (20%) over a two month period to be a bear market. Based on this definition, it would appear superficially that DFGMI is now in a bear market.
However, the DFGMI is still up 23.33% on a year-to-date basis and up 83.1% on a y-o-y basis. From our perspective, the current downturn is simply a correction following an extremely strong period performance by the index in 2013.
We continue to believe that the underlying growth outlook for the UAE is positive. The economy continues to grow due to strength in the tourism, trade and real estate sectors. The DFGMI posted a blistering 108% increase in 2013 due to a combination of factors. However, inclusion in the Emerging Market index by MSCI was one of the primary catalysts for the strong price performance of the market as a whole.
“From our perspective, valuation levels were overextended especially in comparison to other emerging markets” notes Ryan Mahoney, portfolio manager at Dalma Capital, “Ultimately, corporate profitability and economic growth will be the key drivers of the market going forward.“
Why Valuations Matter?
We continue to believe that the outlook is positive for the DFGMI. The recent correction reflected a normalization of valuation levels. In general, we view price multiples such as the P/E ratio to be mean reverting. In a sense, valuation levels are like a pendulum. Periodically valuations levels will overshoot their historical average and conversely undershoot, but will ultimately return to their baseline level.
Observing valuation data, we can see that at the beginning of 2013 the TTM (Trailing Twelve Month) P/E ratio for the DFGMI (blue line) was far above that of the MSCI Emerging Market Index (MXEF) (grey line). However, as the DFGMI marched upward throughout 2013 and the first half of 2014 the valuation premium became excessive. The overvaluation of the DFMGI becomes even more apparent when comparing directly to the Abu Dhabi Securities Market General Index (ADSMI, orange line).
“Although a valuation premium for the DFGMI relative to the MXEF is warranted, the discrepancy became too large to be sustainable,” observes Elliot Carol, portfolio strategist at Dalma Capital, “Given the recent correction in the market, we view the DFMGI as being much more attractively valued at current levels”
What are the future prospects for the Dubai Financial Market?
The IMF is currently forecasting that the UAE will achieve 4.75% GDP growth in 2014. The growth backdrop is positive with both the tourism and hospitality sectors performing strongly. While Abu Dhabi’s economy is supported by public spending projects, Dubai’s services sector has been the main driver of the rebound.
While the performance of the DFMGI has been exceptional, the recent correction will bring valuation levels back in alignment with other emerging markets. Overall, we maintain a positive bias on the UAE economy and the DFGMI, although we did view the rapid rise of the market in 2013 and the first half of 2014 to be unsustainable from a valuation perspective. We believe the market will consolidate at current levels and expect improved corporate earnings growth to be the catalyst to drive the market higher as opposed to an expansion in valuation multiples.
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