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Emirates Gateway Fund

The Emirates Gateway Fund is an open-ended single country equity fund giving regional and international investors access to the UAE capital market.

The Fund Manager's Market Commentary for January 31, 2012

The Emirates Gateway Fund rose 7.15% in January vs. a gain of 7.34% for the S&P UAE Composite Index. After making multi year lows post MSCI decision to extend the review period for upgrading the UAE, the DFM and ADX found a significant bid as bargain hunting precipitated a rally on high volumes amidst a very positive global backdrop.

In line with our well flagged expectations, macro data in the US and emerging markets continues to show remarkable resilience and has underscored a bang of a start to the year across global markets. Although European debt issues remain front page news, for now they seem to have found greater acceptance in the context of the global growth picture. However, without doubt Europe remains the greatest and most poignant threat to the current recovery; accordingly we expect inevitable hurdles in the process to take a toll on already fragile market sentiment and precipitate further volatility. Having said that, our base case remains a gradual, upward trending global economic expansion and barring a game changing economic event, we would view such volatility as an opportunity to be taken advantage of.

Dubai, in sharp contrast to last year, stands as the second best performing market in the region. Fourth quarter earnings in the UAE have been encouraging thus far however the market has considerably surprised with its recent strength. Our overweight in the banking sector, largely built around a few conviction picks performed admirably as results and dividend announcements boosted valuations and is likely to find further support in the government’s decision to repay the bad loans of UAE Nationals. Offsetting these gains however, were our core positions in a couple of robust industrial names as well as a year-end reduction of beta in the portfolio. Although we are heartened to see investor interest in the UAE rise considerably, especially on high volumes, we believe that any sustained rally requires fundamental legs and continued strength in UAE companies’ results driven by stronger fundamentals on the ground. Further, we keenly watch the upcoming debt maturities in the Emirates and how repayments are managed, an event which could considerably shape sentiment for the coming quarters. Although we do expect near term profit booking, we also point to the rise in volumes attracting a class of investor for whom liquidity has been a significant headwind to investing in the UAE. We expect that the UAE will find a further bid from this class of investor and we look forward to selectively increasing our exposure to the market through any upcoming softness. We maintain our OW in financials in the UAE that from a valuation perspective are some of the cheapest in the region for their level of profitability and maintain our OW in Telecoms and Industrials. Lastly, although the recent rally has been a tide that has lifted all boats, our conviction picks have performed admirably and we continue to stick to strong fundamental plays with predictable cash flows instead of adding or considering speculative names trading on rumour or momentum only.

 

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