We expect a positive performance for UAE shares today after the announcement of 10-year residency for professionals and investors. While we are awaiting more details with regards to eligibility requirements for the investors visa, we believe the move by the UAE’s government could be a well needed shot in the arm for the economy and the market with a possible positive spill over for the real estate sector, and could potentially increase the pool of real estate investors/buyers. Also, this will further reinforce Dubai as a leading place to do business (ease of doing business, favourable tax regime, and longer visibility on residency status). We think the market will react positively to the news and we would have EMAAR (and EMAARDEV) and Aldar shares on our watch list today.
 
The News (expect more details by 3Q18): The UAE Cabinet, chaired by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, has adopted a new system of entry visas for investors (it is unclear whether this would cover only those who establish businesses in the country or include real estate investors as well) and professional talents (specialists in medical, scientific, research and technical fields, as well as for all scientists and innovators)  providing them with a long-term visa for up to 10 years. His Highness directed the Ministry of Economy in coordination with the concerned parties to implement the resolution and follow up on its developments, and to submit a detailed study in the third quarter of this year.  WAM also reported that “The global investors' ownership is expected to reach 100% by the end of the year”, which could mean that the UAE will allow 100% foreign ownership limits (FOLs) but we have no further details as to whether or not the 100% FOL applies to specific sectors only or all companies operating within the UAE. 
 
Market impact? More details are needed, but initial reaction will likely be positive. Potential rerating for the UAE, which is trading at a steep discount to MENA (-30%) and EM (-23%). While the details of the new regulations are unavailable now. We expect the initial market reaction to be positive, as the news could provide the catalyst needed to lift the UAE’s real estate market and improve sentiment towards UAE equities. This could help raise the UAE’s (particularly Dubai’s) valuation back to its historical average (at least) especially that the market (with the exception of FAB and EMIRATES NBD among the blue chips) has not performed well over the last year. The UAE underperformed MENA and EM by 23% and 26% respectively on a one-year basis with the MSCI UAE index trading at 8.8x 12-month forward P/E (x) vs 12.5x for MENA and 11.5x for EM (on average the UAE has traded at a premium to MENA and EM over the past five years). Dubai is currently trading at 7.9x 12-month forward P/E (x) vs 12.5x 5-year average (e.g. 58% upside for multiple expansion, led primary by EMAAR (uncovered)). Abu Dhabi is in line with the long-term average at 10.4x vs 5-year average of 11.6x 12-month forward P/E (x) (supported by ETISALAT and FAB, which accounted for 63% of the ADX index), but names like ALDAR and ADCB offer value.  Within the banking space we prefer EMIRATES NBD (although it remains uninvestable for foreign/GCC investors), DIB , FAB (which offers a good entry opportunity as it is off 10% from the year’s high with a November 2018 MSCI flows catalyst), and ADCB (which has been a laggard and could potentially recover on positive news). EMAARDEV (will be included in MSCI EM this month with cUSD90mn inflows) offers a pure play on the real estate story (with a high dividend yield, c9%), which could be a strong theme given the new visa system.
 
100% FOLs? Details needed, but we look at the potential for UAE equities under a 100% FOL scenario - Favourite names would be EMAAR, FAB, and EMIRATES NBD: potential for 74bps increase in weight, and cUSD4.65bn worth of passive inflows. It is unclear whether the planned 100% foreign ownership limit will be  i) applicable to certain sectors only; and ii) whether the change will be limited to the text of the companies’ law but not necessarily forcing (or encouraging) listed companies to raise FOLs to 100% (it is worth noting that 50% of UAE listed companies are still below the currently allowed 49% limit or are completely closed to foreign investors). In a scenario where FOLs are increased to 100%, this could provide a significant boost to UAE’s index weight within MSCI and FTSE EM and lead to cUSD4.65bn worth of inflows.  It would also mean that equity stories like EMIRATES NBD (FOL increase to 20% still in process), ARAMEX, DU could become accessible to foreign investors.  We note that ADCB, DAMAC, DPW, EMAARDEV, and EMAARMLS would not benefit (from an index weight and flows perspective) from a 100% FOL scenario as free float is limited.

Mohamad Al Hajj