Bahrain tops dividend yields in mixed quarter for bourses

Hamad I Mohammed/Reuters

• First-quarter company earnings varied
• Bahrain’s 7.7% the best dividend yield
• Markets sensitive to foreign jitters

First-quarter company earnings in the UAE, Bahrain and Oman were mixed across major economic sectors, with the four bourses trading at markedly varied valuations.

As of March 31, Dubai and Bahrain had price-to-earnings ratios of 8.3 and 7.9 respectively, while Abu Dhabi’s was 19.9 and Oman’s 12.9, according to Kuwait’s Kamco Invest.

Bahrain (7.7 percent) provides the best dividend yield, followed by Dubai and Oman (both 5.3 percent). Abu Dhabi’s was 2.1 percent.

These price-earning ratios will now be lower and the dividend yields higher following a foreign investor sell-off that has weighed on Gulf bourses.

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“According to almost every metric, Dubai’s real economy is running red hot, but its stock market historically has also been the Gulf’s most sensitive to foreign investor sentiment,” said Akber Khan, acting chief executive officer of Al Rayan Investment in Doha.

“When there’s conflict in the Middle East, foreign investors are typically more jittery than domestic ones and sometimes judge the region by headlines rather than activity on the ground, which has weighed on Dubai stocks.

“In many cases, this provides buying opportunities.”

The differing yields and ratios follow a mixed first-quarter earnings season, in which UAE telecom operator Du was among the standout performers, reporting a 63 percent rise in profit versus the prior-year period. 

Junaid Ansari, Kamco Invest’s director of investment strategy and research, said this was due to increased mobile and fixed line subscribers, which boosted revenue and lower operating costs.
 
Most Bahraini blue-chip companies posted strong first-quarter earnings, which Ansari attributed to a stable domestic operating environment that enabled banks and other financial services companies to prosper.
 
Major UAE banks reported year-on-year profit rises of 3.7 to 30.9 percent as lower expenses and reduced provisions more than offset declining net interest and non-interest income, Ansari explained.

Banking and commodities-related companies dominate Gulf bourses in terms of market capitalisation, while the outlook for banks is uncertain with much dependent on whether the US Federal Reserve cuts interest rates.

Gulf central banks largely follow Fed rate moves due to the various currencies’ dollar pegs. Higher rates usually translate into greater net interest margins (NIMs) for banks although the rate increases have been so steep that customers have switched money to savings accounts thereby diminishing marginal gains.

In the first quarter, average NIMs for Dubai and Abu Dhabi banks were 4.3 and 2.9 percent respectively, Kamco estimates.

Omani banks also prospered thanks to expanded lending and higher non-interest income, said Ansari.

The Fed had long been expected to start cutting rates in 2024 from a two-decade peak but the organisation is now hinting that any reductions may be later than planned.

“There’s a chance the next rate move will be up, not down,” said Khan.

Dubai’s Al Mal Capital is underweight on Gulf banks, with higher-for-longer interest rates likely to impede loan growth, said Faisal Hasan, chief investment officer.

“For the past 10-15 years, investors have been operating in an ultra-low-rate environment,” said Hasan.

“Now that’s changed to a higher rate environment and equities have more competition from other asset classes such as bonds, but in the long term quality stocks will still provide excellent returns – that’s where we invest.”

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Historically, Gulf market trading activity dwindles over the summer as investors go abroad. It is also a period when institutions reposition their portfolios based on what their focus will be for the rest of the year.

“This year, this will be mostly on cash-rich companies with low debt and an ability to finance their growth from generated cash flows,” said Marwan Shurrab, managing director of Alpha Advisory in Dubai.