Not just real estate, UAE companies are fair game when it comes to deals

It is generally accepted that asset prices are perhaps most susceptible to purely social movements, since there is no accepted theory to understand the value of these assets. Investors have no model, or at best a very incomplete model, of the price, dividend, rental yield or yield behavior of such assets.

As such, they are broadly classified as a speculative asset class. As the gambling instinct periodically goes awry, we see assets with no intrinsic value such as cryptocurrencies, or even art, trade at ridiculous levels. We’ve seen this frenzy at the macro level too; in 1989, Japanese equity prices as a whole rose to over 60 times trailing 12-month earnings.

Over the ensuing 3-decade period, investors earned a total return (including dividends below 5%). The problem with thinking of assets as “lottery tickets” is to forget the adage of investing, which is to buy a business. From that perspective, it’s about the returns the business is generating and then adding weight through the wonders of compounding returns.

Valuation then becomes a key metric; in fact, investors actually want asset prices to continue to fall after purchases begin in order to accumulate more assets. Day-to-day price action becomes irrelevant, only extremes (either ridiculously low or ridiculously high) are of concern.

Viewed in this light, investing is more about controlling temperament than intellectual function, especially in an overstimulating environment of social media and constant news.

Among the local populace there is still a clear bias towards investing in all things American, especially when it comes to financial assets (stocks, cryptocurrencies, etc.). Oddly enough, not so long ago, the same bias was evident in real estate. London is the favorite hunting ground for most of the expat community.

This zeitgeist has changed radically, but at no time in the history of finance and urban development has there been a sustained “runaway effect” in the price of one asset class without affecting others. In other words, the entire floor goes up with the development of the economy and a more flexible economic system.

There is no doubt that even in the world of financial assets, IPOs are a world within a world, a corner of the market with its own characteristics, customs, and regulations that are almost as indistinguishable from each other and create a transitional An ecosystem of leverage and speculation. Market participants act and react to events happening in real time, but this maelstrom of decision making seems to work to some extent – when we know bubbles and negative bubbles can be cyclical when it happens.

In Japan, given prevailing valuations, the stage is set for a period of above-market returns, while in the US, broadly speaking, the opposite is true regardless of market sentiment. Where does a market like the UAE go from here?

Much of the recent IPO activity has coincided with other corporate actions – Union Properties’ proposed turnaround, Sukoon’s acquisition of Ascana and CVC’s acquisition of Network International, among other merger activity. This shows that as the breadth of the market increases, there is a growing awareness that market valuations are still skewed towards cheap.

More players are increasing activity in the secondary stock market with the listing of payments provider and first fintech company MBME Group, while Ethmaar is expected to list in the first week of May. These private sector products will be offered at different valuations, and in the process, investors can have more choices in allocating their capital, thereby normalizing capital market activity and encouraging capital formation and risk-taking.

While the U.S. leads in innovation, the increase in technology offerings in the UAE will likewise encourage and allow for a greater emphasis on financing for domestic businesses, for those who know it.

For the rest of us, emphasizing dividends is a way to earn returns from a stable business that, combined with the compounding effect, can create wealth hitherto unavailable to expats. In either case, it’s about buying businesses, not focusing on price action (instead of focusing on valuation).

Classes that focus on arcane price trends, improving price efficiency, often result in ridiculous prices (Doordash anyone?) because herd mentality means prices are set by the most emotional people. It’s these distorted sentiments that distort valuations (as they did in Japan in the late 1980s, and arguably more recently in the US as well.

In the UAE, the total price means that the price and risk are positively correlated (buy Network international after the share price has fallen, it is less risky). Despite naysayers, the same pattern is playing out in Dubai’s real estate market.

As long as investors take this fundamental approach, growth in capital markets (primary and secondary) is a gift waiting to be unwrapped.