a letter from dubai

Dubai is one of the most exciting investment outposts in the emerging world. We have been bullish on this market for some time and, following our recent visit to the region, our thesis remains intact. Dubai is back and is more robust than ever. It is experiencing a real recovery and stocks have re-rated as a result. However, we feel there is still further upside as solid economic growth translates into earnings growth.

a letter from dubai


A few years ago our visits to Dubai were not so promising. The story was the massive oversupply in the property market, high system leverage and asset quality issues for the banks. But this narrative has turned full circle, with 2013 GDP growth at 4.7%, driven in part by the strong recovery in the property sector and booming trade and tourism. In fact, Dubai was one of the best-performing markets globally last year, with the Dubai Financial Market General index gaining more than 100%.

Dubai benefits from its strong position as a regional hub. It has the world’s second-busiest airport for international passenger traffic and is home to Emirates, one of the world’s fastest-growing airlines. This bodes well for the trade sector, where we hold DP World, a global port operator that is benefiting from Dubai’s buoyant economic activity, so much so that it is bringing capacity online this year to its massive Dubai port, Jebel Ali, to accommodate the continued growth across the region.

The recent ‘Arab spring’ demonstrations remain fresh in investors’ minds but many may be surprised to hear that Dubai benefited from the movement. The emirate was a beacon of stability during the period and attracted many wealthy families from the troubled countries of Libya, Egypt, Syria and Pakistan.

Together with a fall in construction activity in the past few years, this has driven a recovery in the Dubai property sector that saw a 30-40% rise in prices in 2013.

The key difference today is there is very little leverage in the system and demand is sustainable for at least the next three to four years. One of our fund’s biggest holdings is Emaar Properties, the largest property developer in the region, which has seen a huge pick-up in demand in the residential sector. The company has also benefited from booming tourism due to its Malls & Retail and Hotels segments. Visitor numbers to its Dubai Mall reached 75 million in 2013, making it the world’s most visited destination.

We also participated in the recent initial public offering of DAMAC Properties, one of the largest luxury property developers in the Middle East, which is seeing substantial growth. It has driven up revenues by 77% year on year and surprised on the upside as its bottom line beat consensus forecasts by 25%, posting 202% year on year.

Banks are also an attractive part of the market and key beneficiaries of the economic recovery and healthy macro backdrop. They are well capitalised with attractive yields. We hold Dubai’s leading bank Emirates NBD, where we expect returns on equity to improve as asset quality repairs and growth to surprise on the upside.   

Sentiment towards Dubai has improved dramatically and has been given a further boost as it prepares to host the Expo in 2020, which is expected to draw millions of visitors. Preparations and staging of the event is expected to create between 250,000 and 300,000 new jobs in the United Arab Emirates, which will result in an injection of almost $40bn (£23.7bn) into the local economy. Near term, the market continues to benefit from its impending upgrade to the MSCI Emerging Market index, putting it on the radar screens of many emerging market investors.



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