Investment Options in the UAE
With a reputation of one of the most dynamic global financial centres, it is no wonder that the UAE, and particularly Dubai, offer plenty of investment opportunities. Whether you live here as an expat or want to invest from abroad, selected UAE investments can be a good addition to your portfolio and an interesting alternative to traditional markets like the US or Europe. In this article, we will look at UAE equities (stocks), bonds and funds.
By buying shares in a company you become a co-owner and receive a small portion of its profits in the form of dividends. You may also realize capital gains when you sell the shares later at a higher price. You can buy and sell shares in publicly traded companies on stock exchanges, usually through a broker.
There are three stock exchanges in the UAE:
- Dubai Financial Market (DFM) focuses on shares in companies from the UAE and other Gulf countries, such as Kuwait, Bahrain or Oman.
- Abu Dhabi Securities Exchange (ADX) focuses mainly on UAE companies. Compared to DFM there are a higher number of stocks, but trading volume tends to be lower.
- NASDAQ Dubai lists both domestic and international companies of all sizes and also offers trading in bonds, REITs (Real Estate Investment Trusts) and equity derivatives (futures and options). It was previously known as Dubai International Financial Exchange (DIFX) and rebranded in 2008 after NASDAQ OMX acquired a stake.
The FTSE NASDAQ Dubai UAE 20 stock index has gained over 87% (measured in USD) since the beginning of 2013. It was even higher last summer, but in recent months it has underperformed due to falling oil prices and a strong dollar – this might actually be a good buying opportunity.
Nevertheless, contrary to popular belief, equity markets in the Middle East are not just oil and gas. Other sectors, including financials, transportation, consumer goods, real estate and industrials, are also heavily represented among UAE traded stocks.
Bonds are debt instruments. An investor is lending money to the bond’s issuer – a company (corporate bonds), municipality (municipal bonds) or country (government bonds). He receives regular income in the form of a coupon or interest payments and also gets the full nominal value of the bond back at maturity, which can range from a few months (these short-term bonds are typically called bills or notes) to as long as 30 years or more. The main difference from stocks is that the income and final repayment value are more or less certain (unless the issuer defaults) and known in advance, which is why bonds are often referred to as “fixed income”.
That said, there are specific features to some UAE bond issues due to compliance with Islamic Law, which doesn’t allow interest in its traditional form (these bonds are called “sukuk”). While some UAE traded bonds work just like the typical western bonds, others have very different risk and return profiles. If you don’t have experience with Islamic bonds, it is better to seek the advice of a professional or invest indirectly through a fund.
Many investors, especially those with smaller amounts of money or limited experience, will benefit from investing in stocks and bonds through mutual funds or exchange-traded funds. However, this does not mean that selecting funds which are most suitable to your objectives and risk profile is an easy task.
There are many different kinds of funds available to UAE investors – equity funds, fixed-income funds, value and growth funds, sector funds, active and passive funds, and Sharia-compliant or non-compliant funds. Those with larger portfolios have additional options such as hedge funds, private equity funds and other alternative funds.
How to Invest in the UAE
Apart from local specifics like Islamic Law, investors should follow the same investing rules as anywhere else. Know your time horizon, objectives (e.g. saving for retirement), risk profile, and constraints (e.g. ethics or liquidity needs). Make sure you understand how costs and taxes will affect your returns (many investors underestimate them). Do not keep all your eggs in one basket and diversify, but at the same time do not fragment your portfolio too much, as doing so will increase costs and limit your ability to manage it effectively. Most investors will find that professional advice (from the right person or firm) is worth the cost, especially when you are not familiar with the region or with the particular kinds of investments.