While political unrest has driven a negative re-rating of Turkey and Egypt, countries in the Middle East that have stayed out of the headlines have seen a strong surge in their local indices. One beneficiary â€” the United Arab Emirates.
Looking at the UAE’s city-states, both Dubai and Abu Dhabi have seen strong inflows and rising equity levels. The Thomson Reuters UAE index has risen approximately 45% this year, paced by Emirates Bank, one of the region’s full-service providers of banking and financial services. Earlier in the week, the chairman of the UAE’s banking federation commented that banks in the region should post net profit growth of approximately 20% in 2013. The full story on Reuters.com can be found here.
Strength and stability
With such strong growth and a history of political stability its unsurprising that investment has been pouring into the region. Dubai has had quite a counter cyclical investment experience. While most emerging markets were seeing inflows during the Arab Spring crisis, Dubai was dealing with the effects of a devastating property bubble. With that experience now behind it, the city-state is well-positioned to market itself as an alluring Middle Eastern investment destination in a time of rising political uncertainty.
Let’s take a closer look at one of Dubai’s larger banks, Emirates Bank, and particularly some of its strong StarMine scores.
The company tallies good scores on many metrics. In line with most global banks, it scores well from a valuation standpoint. This isn’t terribly surprising since it’s hard to determine what a mid cycle earnings stream looks like for an industry undergoing fundamental regulatory and business model change, then there’s the fact that many of these banks tend to have an amazing capacity for self-harm. Or total opacity around both the composition or quality of assets on the balance sheet.
Of particular note is the Smart Holding model, which decomposes existing institutional holdings to understand which factors are driving stock selection â€” growth, ROE, leverage, price momentum, interest coverage and so on. Knowing which factors are in favor (which tend to change quite slowly), investors can look at which companies are starting to exhibit those trends. (Price, earnings, etc. change much more rapidly.) One can then start to forecast companies likely to become more popular from a buyside perspective. A score of 98 indicates that Emirates Bank offers many of the fundamental factors that are currently in vogue from an institutional investment standpoint.
Lastly, there seems to be a more sensible management focus. Listening to the Q2 earnings call via Eikon, it’s notable that bubble exuberance has been replaced by sober, understated banking â€“ the kind regulators are desperately seeking in Europe and North America. The revenue chart below shows that while revenue is now higher than the top of the last cycle, the rates of growth appear reassuringly modest â€“ and, one would hope, sustainable.
Lastly, it’s always worth seeking confirmation from other market participants â€“ and the CDS market seems to indicate nothing amiss. With a 5.2% predicted surprise for FY1, trading at 0.8 times book value, 5.3% yield and exposure to the fast growing UAE, Emirates Bank seems worthy of investigation.
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