Saudi Arabia and the UAE set pace in GCC equities race

Reuters

The race to become the leading financial marketplace in the Arabian Gulf is hotting up, with three clear leaders pulling away from the rest of the field – at least in the equity stakes.

Still well out in front is Riyadh, the undisputed giant of the region in equities with a total market capitalisation of around $3 trillion for the Tadawul index. This reflects the much bigger size of the Saudi Arabian economy, as well as significant steps taken over recent years to attract foreign investors into the kingdom’s stock markets.

But closing ground rapidly are the two big exchanges in the UAE.

There must have been some big cheers from the stands this week when Bloomberg data showed that the combined market capitalisation of Abu Dhabi and Dubai had hit the $1 trillion level for the first time in their history.

This is the result of a two-year surge in UAE equity values that, amazingly, has made the Emirates’ stock markets more valuable than much bigger and longer-established bourses in, for example, Spain or Brazil. The post-Covid recovery strategy has paid off big time for UAE equity markets.

Admittedly, a very big chunk of that value is attributable to International Holding Company, the fish-farms-to-finance conglomerate controlled by members of the UAE government – more on which later.

But there is no denying that over the past four years the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market have matured into markets of real value for local and international investors.

This process is, if anything, accelerating.

There were some fascinating figures recently from Iridium, the investor relations consultancy that is based in Dubai but covers the whole region with its research.

According to its analysis, the UAE attracted more international cash into its two equity markets in the 10 months to the end of October than Saudi Arabia in the same period. Cumulative net foreign inflows into Emirates’ equities totalled $5.7 billion, compared with $4.1 billion into the kingdom’s stock market.

As Saudi Arabia has traditionally been the dominant market for foreign capital in the region, this development indicates “a shift in investor preference towards UAE markets as they diversify their allocations within the GCC,” Iridium noted.

Of these big inflows into the UAE, the lion’s share by far has gone to Abu Dhabi, at $5.3 billion.

The bottom line – the share price – shows the proof: IHC is an anchor constituent of the ADX

The role of IHC within the Abu Dhabi market has been a subject of speculation and discussion for some time, certainly since it went from zero to stock market hero in the space of a few years.

It is not a constituent of the MSCI Emerging Markets Index, which is the main instrument for most foreign investment in the UAE. So, you have to assume that the vast majority of the investors who have benefitted from its meteoric rise have been UAE and other GCC institutions and individuals.

Currently, IHC comprises 46 percent of the ADX capitalisation, according to Bloomberg, and 25 percent of the combined UAE markets’ value.

Other companies in which IHC or its executives are involved – such as Aldar, Alpha Dhabi, Multiply and First Abu Dhabi Bank – are in the MSCI, so can attract direct foreign investment.

Questions have been asked about IHC’s valuation models for its portfolio companies, but the bottom line – the share price – shows the proof: IHC is an anchor constituent of the ADX and the rising tide it has created has lifted most of the other stocks on the index.

DFM inflows are much smaller in comparison with ADX – $359 million in the first 10 months of this year – but investors in Dubai have good reason to be pleased. Overall, the DFM has risen 17 percent this year – the best performer in the GCC – while ADX is trading down 2 percent.

It is not just about equities, of course. Dubai scores highly on the wealth and asset management side of the financial business, and in private and family office banking, although recently Abu Dhabi has shown some impressive growth in this target area, too. But that’s a different race.

So, that’s how it looks In the Gulf Equity Sweepstakes. Riyadh way out in front, but with Abu Dhabi and Dubai coming up fast.

The rest of the field – Qatar, Bahrain, Kuwait and Muscat, whose numbers are small in comparison – has a lot of ground to make up.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia.