UAE shares are more attractive than those in Saudi Arabia because the nation is less vulnerable to oil price swings and Dubai's real estate industry is starting to recover, Saxo Bank said.
A 19 per cent advance for the Dubai Financial Market General Index makes it this year's best performer in the six-nation Gulf Cooperation Council, beating the 11 per cent gain for Abu Dhabi's measure and 4.9 per cent for the Saudi Arabia's Tadawul All Share Index. Shares in Dubai and Abu Dhabi trade at respective price to earnings ratios of 12 times and 9.2 times, below 14 times in Saudi Arabia.
"We are more positive on the UAE as the country's policy has been to focus on diversifying its income stream on tourism and the financial sector, meaning there's less dependency on oil," Peter Garnry, an equity strategist at Saxo Bank, said. "Saudi Arabia on the other hand is exposed to increased vulnerability due to its dependency on oil."
UAE shares gained as Abu Dhabi, holder of most of the nation's oil reserves, invests in industries including metals and chemicals. Investor interest also grew as state-linked companies in Dubai, which derives about 2 per cent of economic output from oil, restructured debt and property prices in the city recovered after crashing 65 per cent. Emaar Properties, Dubai's biggest listed company, soared 47 per cent this year after a pickup in tourism and retail industries.
Saudi Arabia, the world's top oil exporter, relies on crude for about 90 per cent of government revenue. Its index lost the position as the GCC's best performer about six months ago as concern about King Abdullah's health triggered questions on political succession. Brent crude, the benchmark for more than half of the world's oil, dropped 3.2 per cent this quarter to $108.75 a barrel in early trade in Dubai.
Along with domestic politics, tension between Iran and the West has weighed on Saudi shares in the past month on concern Israel may consider striking the country's nuclear facilities. The Tadawul's 10-day volatility, a degree of price variation, was 21 yesterday, compared with 30-day volatility of 14. The same measures for Dubai and Abu Dhabi were little changed.
A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
"In the event of a crisis between Israel and Iran, we would see oil prices spike, and this would benefit the kingdom in the short term, but in the long term it would be negative as it would slow global economic growth," Mr Garnry said.
The UAE is also poised to benefit from being less susceptible to fallout from the so-called Arab Spring than its peers, he said. Popular unrest in the past two years has toppled leaders in Tunisia, Egypt, Libya and Yemen, sparked a civil war in Syria, and led to protests in Bahrain and Saudi Arabia's Eastern Province.
"In general, we consider the UAE to be the region's safe haven, both in term of capital and business," Mr Garnry said.
* Bloomberg News