Emerging markets: UAE’s journey from desert sands to investment oasis

Emerging markets investors should take a close look at United Arab Emirates right now. Senior fund manager JAMES SYME explains why

• UAE has made a powerful post-Covid recovery
• Significance of structural reforms ‘underestimated’
• Find out about Pendal Global Emerging Markets Opportunities fund

FOR YEARS, the United Arab Emirates was the building site of the Middle East.

Originally largely desert, the cranes took over a few decades ago – and today the UAE boasts some of the most exciting architecture in the world.

Sophisticated transport networks and sprawling shopping malls put the country firmly on the tourist map — though it’s taken a little longer to win over investors.

A recent boom — following a series of economic reforms and a powerful recovery in oil production — has caught the attention of emerging market investors.

Now, the UAE looks almost as bright and shiny as the Burj Khalifa after dark.  

The return of oil and tourists

The UAE was hit badly by Covid, reporting with the most confirmed cases compared to its neighbouring Arabian gulf states.

Transportation revenues fell and aviation plummeted, leading to a variety of issues including a tumble in the profitability of real estate and a rise in unemployment.

The Covid travel ban – which stopped flights into and out of the UAE — prompted an 83% drop in visitors compared to pre-Covid.

But the country has made a powerful recovery and tourists are back.

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In 2022 the UAE welcomed some 14.4 million overnight visitors, a 97% increase from 2021. The numbers so far for 2023 are also extremely encouraging.

Dubai and Abu Dhabi revised some tax policies, including those related to alcohol, in a successful effort to boost tourism for business and leisure. 

There’s also been a full recovery in oil production, which took a significant tumble during Covid.

The country has the seventh-biggest oil and natural gas reserves globally, equivalent to 97.8 billion barrels per year or about 30% of its GDP.

Covid caused huge delays in production and output fell below expectations, taking a toll on the economy.

But supportive government policies and increasing investment have boosted the industry which now expects compound annualised growth of 8.4% in daily barrel numbers over the next five years

Structural changes for good

But it’s the structural changes implemented by the president, Abu Dhabi’s Sheikh Mohamed bin Zayed Al Nahyan, that have lent the region the greatest support.

Although this Sheikh does not operate a democracy, he is leading with sensitivity to the needs of his citizens – and in a way that’s supportive of growth. 

His many reforms include the creation of a new visa category for non-nationals which allows longer residency of up to 10 years.

Abu Dhabi has also introduced a freehold law which allows foreign investors to buy property (previously restricted to UAE and Gulf Cooperation Council nationals).

These changes mean foreign nationals can now live and work in the country for a decade and buy property there, rather than just moving transiently through.

This is really helping support the movement of foreign nationals into the region. 

Other successful reforms have targeted the development of Abu Dhabi and Dubai as financial centres. In 2022 the region hosted roughly a quarter of all global IPO volume.

This boost has driven a rise in financial services firms opening local offices, which has firmly put it on the industry’s map.

Geography helps too. The UAE is in a similar time zone to London, with a working day that overlaps with Asia and the US.

Strong travel and transport links seal the deal.

Overweight UAE

In the Pendal Global Emerging Markets Opportunities strategy, we follow a top-down, country-level approach.

We believe analysis of the asset class should always start at a national level.

After taking a thorough look at the UAE’s recovering tourism, trade and oil sectors in the context of the Sheikh’s deep structural reforms, we moved our position to overweight.

Our strategy is now exposed to domestic sectors in retail, commercial and residential real estate, and the commodity side of the economy in Dubai and Abu Dhabi. 

Despite all the bright lights, we think the region has perhaps previously flown under the radar, and the significance of the structural reforms has been underestimated.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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