Ranking the Emirates

 
 

 
Ranking the Emirates
22 Feb 2010
Numerically ranking assets and indices in the UAE equity universe illustrates future outperformers.
Emotional Rankings
Comparisons can get controversial. But let’s face it we are on the mean street, market values every asset and index with a traded tick. So why get so touchy about the fact that the asset we love is low or high in rankings. There are a few other aspects of markets we always forget when we get emotional and attached. We rarely pay attention to time. Investing community is so interested in the 2010 winners that little do we pay attention to winners of 2012. “Who can see that far?” might be general remark. We will stick to the popular quest and talk about potential winners of the coming quarter.
The other aspect is linked with the psychology of ranking. If it was not for being low in the rut, how would one have that drive to succeed, to come back at the top, to be an underdog and win the race. This is what both life and markets are made off. The best risk takers are the back benchers, who take risk and the top rankers are the one who get complacent about risk. Al Ries and Jack Trout said in their book Horse sense, The ‘A’ graders may be great lawyers and doctors making us proud, but it’s the C graders who come and give grants to universities. There are no rules in markets, but the guideline is that you will take risk not when you are at the top, but when you have nothing to lose. Running businesses is always about odds, the higher the odds a business can overcome, the more it sustains, grows and succeeds. Odds are the one that force the businesses to innovate, create and strive. So you see low rankings have inherent benefits.
The ranking process
Now that we have made a case for objectivity, let’s see where the Emirates and its assets stand. So how do we rank? We take a group of assets and rank them against a benchmark. One can call it relative performance or plainly as alpha. We took three cases for the Alpha UAE. One is the top banks in the Abu Dhabi Banking and Financial sector. Second we took all sector indices from the Dubai Financial Market and third we took all the global indices including the Abu Dhabi Index (ADI). The aim was to see where were UAE indices and assets on the global and local relative ranking map.
Cases
Case one; we sorted all the banks for market capitalization and took the top 11 viz. NATL BK OF AD, FIRST GULF BK, AD COMMERCIAL BK, UNITED ARAB BK,   UNION NATL BK, NATL BK FUJAIRAH, AD ISLAMIC BK, NAT BK QAIWAIN, BANK OF SHARJAH, NATL BK OF RAK, SHARJAH ISLAMIC, INVEST BANK. We benchmarked all the banks against NATL BK OF AD. The markets ranked NATL BK OF RAK, UNITED ARAB BK, NATL BK FUJAIRAH at the top and NAT BK QAIWAIN , UNION NATL BK , AD COMMERCIAL BK at the bottom. The idea laid down above suggests that the real outperformers of the next quarter should be the latter (worst performers) not the former (the best performers).
Case two was the sectoral view. Here we put all the Dubai sectoral indices and the ADI together. BANKS IDX, INV & FIN SV IDX, INSURANCE IDX, REAL EST & CON, TRANSPORT IDX, MATERIALS IDX, CONS STAP IDX, TELCOMMS IDX,   UTILITIES IDX, ADX INDEX indices were compared against DFM GENERAL IDX. The results, ADI, REAL EST & CON, MATERIALS IDX were the top rankers while TRANSPORT IDX, TELCOMMS IDX , INSURANCE IDX were the worst performers over the last quarter. The cyclical tendency suggests that what performed in the last quarter will underperform in the quarter ahead. ADI should underperform not only DFM General Index but most other sector indices over the coming months. And the best sectors to hold as passive investments are Transpiration, Telecom and Insurance. All of the mentioned sectors lie in the early expansion and late contraction stage of economic cycle, as indicated last time.
The final case is where we have compared ADI among the world’s top equity indices viz. BVSP (Brazil), IRTS (Russia), Sensex (India), DOW (US), DAX (Germany), CAC (France), Nikkei (Japan), Hang Seng (Hong Kong). We benchmarked all the respective indices against S&P500. ADI was one among the bottom 3 rankers. This means that barring Sensex (India) and Hang Seng (Hong Kong), ADI is set to outperform the rest of the global indices.
Conclusion
Geographical biases either makes us give too much weightage to the Dow psychology (being glued the Dow levels) or be too pessimistic about a local asset or Index. Markets have an uncanny ability to reward the losers and punish the winners. As strange as it may sound, performance is cyclical at all time frames and across assets. To comprehend and invest we don’t need lateral thinking, but research solutions that are scalable, simple and accountable.