UAE shares trading below their IPO price?Investors should look at the big picture

It is against this backdrop that recent commentary on recent IPOs needs to be scrutinized.

Market discussions about the secondary performance of the recent Dongfeng Motor Corp IPO listing have sparked fresh commentary on its status as an investment haven for expatriates, who would rather invest in more liquid investments despite their recent disappointment foreign market years.

In other words, there is an asymmetry here: foreign markets cannot “get it wrong” just because they are more mature and inherently more liquid. The domestic market, on the other hand, is not.

This has led to rather anomalous results: we seem to have more confidence in the crypto market than in the local capital market. (Compared to the latest technological “fad” at the time, there were similar examples in the real estate market ten years ago). In the case of these present-day beliefs, we don’t necessarily feel that we know our beliefs are true: it’s just that it’s known that others, elsewhere, have addressed them in detail. The problem is that markets aren’t really visible from any vantage point — only the individual transactions that make up them.

With all the interactions of all buyers and sellers, a huge price vortex is formed out of it. We create markets: what we create together works back on each of us as an independent force.

We can respond to this by describing it as part of a complex phenomenon and capitalize on its movement using the language of power. Instead, we prefer to see it simply, as a cliché, an inescapable fate, a sentence to be obeyed.

This is completely wrong, and we can go one step further: the market is silver and gold, the product of human hands. They simply reflect a conglomerate of general sentiments rather than any form of justice or compassion. In Dubai, as is the case in the Middle East, there is an explosion of corporate activity and we are still in the early stages of this phenomenon. We know there will be many more listings like this, and with each listing, there will be multiple options in terms of allocating investments, both from domestic and international players. These short-term market fluctuations should be exploited, or rather avoided.

How do we know? We know that asset formation (and accumulation) is the basis of any modern economy, which manifests itself as a cornucopia of factors at play over time. From shareholder activism to relative price arbitrage to value discovery as more players begin to interact with the market. That’s not to say every IPO will be a windfall success (a vestige of the zero interest rate era that has dominated the market for the past two decades). The market doesn’t take care of people and is probably crazier than anyone involved.

However, we know that the greater the number of players, the less likely individual firms are to experience systemic inefficiencies. Value investing—the only kind of long-term investing—will lead to a rise in the bottom line as price discovery becomes more efficient and precise over the long run. (Companies below book value or replacement value will naturally rise over time).

We’ve seen value discovery in companies like UPP, Tabreed, Emirates Steel, and others. Differentiated companies are able to allocate capital more efficiently, but more importantly, they are able to attract players who believe this to be the case.

The Americana IPO has increased the flow of liquidity and the diversity of options for investors, but the IPO is not a separate asset class, but a part of the entire capital market. Over time, these markets act as weighing machines. For a city that has so far excelled in every endeavor it has been a part of, there’s nothing to suggest — despite short-term volatility — that its financial markets won’t be either.