Abu Dhabi: understandably cautious
Published: November 16 2010 10:04 | Last updated: November 16 2010 15:52As popular corporate buzz words go, “emerging markets” makes almost every boardroom’s top 10. So it is strange to hear that Aabar, the Abu Dhabi investment vehicle, has sold its stake in Banco Santander’s Brazilian unit, and may buy a stake in telecom operators in the US or Europe.
But is selling out of emerging markets and buying into developed ones such a bad idea? The “buy low, sell high” rule is on Aabar’s side. Brazil’s main Bovespa index trades at over 13 times company earnings, while the S&P Euro350 telecom index is valued one-third less. And while the Bovespa is flirting with all-time highs and may yet prove to be an incipient bubble, the European index is still one-quarter below its peak. Furthermore, the strong appreciation of the Brazilian real over the past two years has inflated prices for foreigners, and brought with it a new tax on foreign capital inflows.
Of course, developed nations generally have lower growth prospects, but a degree of caution from Aabar and its peers is understandable, particularly when the Gulf region’s banking system has not yet bottomed out. Indeed, the first nine months of the year saw Abu Dhabi Commercial Bank alone record impairments of more than $700m. And monetary policy remains focused on stabilising financial institutions rather than combating inflation, notes the Economist Intelligence Unit.
No wonder Aabar invests barely 6 per cent of its $10bn portfolio outside Europe and the United Arab Emirates, while Abu Dhabi Investment Authority, possibly the world’s largest sovereign wealth fund, allocates as much as 85 per cent of its funds to developed markets. After the UAE’s economy contracted 2.5 per cent in real terms last year, and with parts of the region still in crisis mode, the relative certainty of developed markets has its appeal – particularly at current prices.
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But is selling out of emerging markets and buying into developed ones such a bad idea? The “buy low, sell high” rule is on Aabar’s side. Brazil’s main Bovespa index trades at over 13 times company earnings, while the S&P Euro350 telecom index is valued one-third less. And while the Bovespa is flirting with all-time highs and may yet prove to be an incipient bubble, the European index is still one-quarter below its peak. Furthermore, the strong appreciation of the Brazilian real over the past two years has inflated prices for foreigners, and brought with it a new tax on foreign capital inflows.
Of course, developed nations generally have lower growth prospects, but a degree of caution from Aabar and its peers is understandable, particularly when the Gulf region’s banking system has not yet bottomed out. Indeed, the first nine months of the year saw Abu Dhabi Commercial Bank alone record impairments of more than $700m. And monetary policy remains focused on stabilising financial institutions rather than combating inflation, notes the Economist Intelligence Unit.
No wonder Aabar invests barely 6 per cent of its $10bn portfolio outside Europe and the United Arab Emirates, while Abu Dhabi Investment Authority, possibly the world’s largest sovereign wealth fund, allocates as much as 85 per cent of its funds to developed markets. After the UAE’s economy contracted 2.5 per cent in real terms last year, and with parts of the region still in crisis mode, the relative certainty of developed markets has its appeal – particularly at current prices.
E-mail the Lex team confidentially
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Abu Dhabi, Finance, Middle East, Money, NEWS, SWF, UK, USA
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