How to invest in Abu Dhabi stocks: ADX flirts with record highs amid ongoing IPO boom
The Abu Dhabi stock market bucked the bearish global investor sentiment to surge to an all-time high in November 2022. The climb comes on the back of elevated oil prices and an ongoing initial public offering (IPO) boom in the Middle East nation.
Are you interested in diversifying your equity portfolio to include companies listed in Abu Dhabi? Let’s learn more about how to invest in Abu Dhabi stocks.
United Arab Emirates (UAE)
The United Arab Emirates (UAE) is a Middle-East nation that has vast resources of crude oil and natural gas. The nation has been a member of the Organization of the Petroleum Exporting Countries (OPEC) since 1967.
According to the Embassy of the UAE, as of November 2022 the country held 10% of the world’s total oil reserves. Energy exports accounted for 30% of the nation’s annual gross domestic product (GDP).
Abu Dhabi is the capital city of UAE. Meanwhile, Dubai is the nation’s most-populous city and has emerged as a global business centre due to several multi-specialty free zones which offer economic incentives such as exemption from corporate taxes, import/export duties and full foreign ownership.
The nation also boasts the world’s third richest sovereign wealth fund. According to Sovereign Wealth Fund Institute's rankings, the Abu Dhabi Investment Authority (ADIA) held assets worth $790bn. The ADIA invests globally across various asset classes, including equities, fixed income, private equities, financial alternatives, real estate and infrastructure.
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Investing in Abu Dhabi stocks: Equity benchmark indices
Let’s learn the basics of the UAE stock market through the nation’s equity benchmark index, the FTSE ADX 15 index.
According to the Abu Dhabi Securities Exchange (ADX), the FTSE ADX 15 is the main benchmark index for the stock market in the UAE. The index was launched on 30 March 2022.
The FTSE ADX 15 is a 15-member index made up of the largest companies listed on the ADX selected on free float adjusted market capitalisation and median daily trading value.
As of 31 October 2022, the financial sector dominated the benchmark index with a sector weight of over 67%. Telecommunications came in second with a sector weight of 16%, industrials third at 7.7%, the energy sector at 4.2%, while real estate and basic materials accounted for over 2% each.
The top constituent on the FTSE ADX 15 was diversified investment firm International Holding Company (IHC) with an index weight of nearly 35%, as of 31 October 2022. First Abu Dhabi Bank (FAB) and Emirates Telecommunications Group (EAND) made up the top three constituents with index weights of 22% and 16%, respectively.
Market participants can also study the broader FTSE ADX General index as an alternative to investing in Abu Dhabi stocks. The FTSE ADX General Index replaced the old ADX General index in January 2022.
UAE stocks performance and IPO boom
The stock market in Abu Dhabi has been on a tear since hitting multi-year lows during the peak of the Covid-19 pandemic in March 2020. Between April 2020 to October 2022, the FTSE ADX General index has failed to post monthly gains in only five months.
The broad Abu Dhabi stock market index surged to an all-time high of 10,671 points on 14 November 2022, brushing aside weakness in investing sentiment seen across the globe.
The benchmark FTSE ADX 15 index has climbed over 6.5% since its inception in March 2022 in contrast to risk asset sell-offs seen in most developed and emerging markets.
Most notably, International Holding Company, which has the highest constituent weight on the benchmark index, has surged over 165% in 2022, as of 28 November.
The outperformance of Abu Dhabi stocks has also been credited to elevated energy prices and an ongoing IPO boom in the UAE. The IPO market in the Middle East has, to date, bucked the global trend with the UAE and Saudi Arabia seeing a spike in new public listings in 2022. Note, however, that UAE stocks are vulnerable to country-specific risks, which are discussed later in the article.
The UAE IPO boom comes on the back of a $1.4bn IPO fund launched by the Abu Dhabi Department of Economic Development (ADDED) in 2021. The IPO fund was established to invest in private companies and provide assistance in listing processes.
A number of family-owned and private companies like schools operator Taaleem Holdings and geographic data and analytics firm Bayanat have listed on the ADX in 2022.
Additionally, Mohamed Al Shorafa, chairman of ADDED said on 14 November 2022 that the organisation was in discussion with 30 other companies to list on the ADX, as reported by Abu Dhabi-based news agency The National.
How to invest in Abu Dhabi stocks?
Interested parties can get exposure to Abu Dhabi equity via investing or trading Abu Dhabi stocks, mutual funds and exchange-traded funds (ETFs), among others.
Stocks
Local investors based in UAE can invest in companies listed on the ADX directly through their online brokerage accounts.
Meanwhile foreign investors looking to diversify their equity portfolio can invest in ADX-listed stocks provided that their brokerage has listed such UAE stocks on their platform.
Index-tracking ETFs
Index-tracking ETFs are considered a convenient way of investing in equity markets. These financial instruments are passive investment tools that track the performance of an index.
The constituents of an index-tracking ETF only change when the constituents of the underlying index changes, which could be due to routine rebalancing based on various factors, including market capitalisation and trade volume, among others.
Index-trading mutual funds, meanwhile, are similar to ETFs yet they trade only once per day, after the market closes. There are also actively-managed ETFs and mutual funds, with a fund manager choosing portfolio holdings instead of an index-based algorithm.
In November 2022, Abu Dhabi-based investment firm Chimera Capital launched a first-ever ETF tracking the blue-chip FTSE ADX 15 index.
Key risks associated with Abu Dhabi equities
Equities and related products are considered high-risk investments as they are vulnerable to market volatility that may arise from global factors or company-specific developments.
In terms of UAE-specific risks, the fluctuation of oil and natural gas price is a key risk for the oil-exporting nation. As mentioned earlier, the UAE derives 30% of its annual GDP from energy exports, therefore a slump in oil and gas prices can be detrimental to the nation’s economy.
Furthermore, investors should keep in mind that stock markets often undergo cycles of peaks and troughs. IPO booms tend to coincide with over-exuberance in the market. Companies see bull markets as favourable periods to offer shares to the public in a bid to get the highest IPO valuation possible.
Benjamin Graham, dubbed ‘the father of value investing’, wrote in his book The Intelligent Investor:
There have been several instances where companies that listed during the post-pandemic IPO boom have seen their valuations fall in the bear market of 2022, such as EV maker Rivian (RIVN) and South Koren e-commerce platform Coupang (CPNG).
How to get exposure via CFDs
Contracts for difference (CFD) can provide an alternative to investing.
What are CFDs? They are leveraged financial derivative instruments that allow market participants to speculate on the price of security, without owning the underlying asset. Traders can take a short or long position by buying or selling the CFD.
However, it is very important to note that CFDs are leveraged instruments which means that CFD trading can magnify profits and losses.
You can trade ETF CFDs that have ADX-listed stocks in their portfolio. For example, the iShares Core MSCI Emerging Markets ETF (IEMG) has Emirates Telecom, First Abu Dhabi Bank, Abu Dhabi Commercial Bank, and other Abu Dhabi stocks in its holdings.
CFD trading allows traders to gain greater exposure to an asset with the available capital through the use of leverage. For example, Capital.com offers 20% margin - or 1:5 leverage ratio - for IEMG ETF CFDs, which means a trader will need only $200 to open a position worth $1000. Note that leverage magnifies both profits and losses.
Traders can also get exposure to oil - UAE’s biggest export commodity through CFDs. Capital.com offers CFDs for both US and Brent crude with 10% leverage ratio.
CFD trading is also a popular tool for shorting as traders are not required to own the underlying asset. A bearish trader can open a short position by simply selling the CFD of the targeted asset.
Traders interested in CFD trading should bear in mind that CFD trading may come with additional charges such as overnight fees and guaranteed stop-loss fees. Note that guaranteed stop-losses are different from regular stop-losses as they guarantee exit positions at the exact specified price, regardless of market volatility. Regular stop-losses, however, may be subject to slippage.
Margin call is a key risk of CFD trading. Traders may receive margin calls to add extra capital into their accounts when the value of their investments falls below a certain threshold. Brokerages may seek additional funds in a trader’s account to cover margin loans if the trader fails to meet margin calls.
Final thoughts
It is important to highlight the value of due diligence before trading or investing. Always conduct your own research before making any financial decisions, looking at the latest news, a wide range of analyst commentary, technical and fundamental analysis.
Traders should understand the risks related to equity markets and to using leveraged instruments such as CFDs. More importantly, it is critical to acknowledge the unpredictability of financial markets.
Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.
FAQs
How can I trade in the UAE stock market?
Investors can gain exposure to UAE stock markets via equity trading, ETFs, and mutual funds. They can also trade CFDs for short-term exposure, yet they must be aware of the risks associated with leverage - it magnifies both profits and losses.
What is the best investment in Abu Dhabi?
If you are interested in investing in Abu Dhabi-based stocks you should conduct your own due diligence before trading or investing. Interested parties can start by learning about Abu Dhabi stock market indices such as the FTSE ADX 15 index and the FTSE ADX General index.
Are Abu Dhabi stocks a good investment?
Whether Abu Dhabi stocks are an appropriate investment ro you should depend on your risk tolerance, investment strategy and goals, and portfolio composition. It is critical to acknowledge the unpredictability of financial markets. Always conduct your own due diligence before investing.
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