Dubai Stocks Poised for 15% Surge on Debt Plan, Gulfmena Says

Bloomberg -

Dubai stocks may climb 15 percent in the next two months as government support for state-owned Dubai World boosts earnings in the world’s cheapest major equity market, according to Gulfmena Alternative Investments.

Dubai said on March 25 it will provide as much as $9.5 billion for Dubai World, and that creditors of real-estate unit Nakheel PJSC will get repaid in full if banks accept the proposal. The announcement spurred a 4.3 percent jump in Dubai’s Financial Market General Index and sent the cost of protecting the emirate’s debt against default to the lowest since November.

The restructuring plan will reduce losses at local banks that lent to Dubai World and increase payments to real-estate and construction companies such as Emaar Properties PJSC and Drake & Scull International PJSC, said Haissam Arabi, chief executive officer of Gulfmena. Overseas investors will boost holdings in the next six months after they left the market in 2008, according to Pictet Asset Management.

“The general trend is upwards, extending all the way into April and May,” Dubai-based Arabi said in an interview. “There’s momentum building up. On a market level I would not be surprised to see a 10 to 15 percent rise.”

Dubai World is seeking to renegotiate $23.5 billion of debt after the global financial crisis and a real-estate crash in Dubai cut the emirate’s access to credit markets. Dubai, the second biggest of seven states that make up the United Arab Emirates, and its state-owned companies amassed about $80 billion in debt to transform the sheikhdom into a tourism, trade and financial hub.

Fund Inflows

Even after a 16 percent rally this month in anticipation of government support for Dubai World, the DFM index trades at 6.5 times analysts’ 2010 earnings projections, according to data compiled by Bloomberg. That’s the lowest level among benchmark equity gauges in the world’s 50 biggest markets and compares with an average of 9.8 since Bloomberg began tracking the data in February 2007.

The announcement is “more positive than what people dared hope for,” said Oliver Bell, a senior investment manager in London at Pictet Asset Management, which oversees about $113 billion worldwide. Bell said he purchased U.A.E. shares on March 25 for his Middle East and North Africa fund, which outperformed 97 percent of peers this year. “Funds will now spend time reassessing them on a fundamental basis as opposed to a speculative basis,” he said. “The market will be rocky, but I think from here it goes higher.”

Real-Estate Overhang

It’s too early to judge whether international money managers will increase their holdings of Dubai stocks because of concern the emirate’s real-estate slump will curb economic growth, said Mohammed Hanif, chief investment officer at London- based Insparo Asset Management. Dubai property prices have plunged by more than 50 percent from their peak in 2008.

“The stock market is a function of future growth and profits, not this one particular event,” said Hanif, who oversees about $180 million in the Middle East and Africa at Insparo. “Until we start to see recovery in real estate, a lot of investors will be on hold.”

Banks in the United Arab Emirates earned less last year as they made provisions for bad property loans and investment- banking income declined. Emirates NBD PJSC more than doubled provisions for bad debt as the U.A.E.’s biggest bank posted a 9 percent drop in full-year profit.

The Dubai World restructuring plan will reduce banks’ credit losses and increase their ability to make new loans, boosting profits, said Shuaa Securities LLC’s Mohammed Ali Yasin.

Bank Earnings

“Banks are much happier than they were a couple of weeks ago,” said Yasin, chief executive officer at Shuaa Securities in Abu Dhabi.

Before the March 25 announcement, analysts forecast earnings growth of 16 percent this year for the 32-company DFM index, Bloomberg data show. That’s in line with the 15 percent earnings growth forecast for the MSCI Frontier Markets Index, which trades at 10.6 times earnings estimates, almost twice the level of the Dubai gauge.

“Stocks are still trading at cheap valuations,” said Ali Taqi, a portfolio manager at A/T Capital Management in Dubai. “It’s a good bargain for long term value-oriented investors.”