Stock markets in the UAE and Saudi Arabia are likely to outperform other Gulf Arab bourses early next year, buoyed by strong economic growth and a recovery in Dubai's real estate market, fund managers and analysts believe.
This year was a mixed and in many cases disappointing one for Gulf equities, as the global financial crisis and geopolitical tensions weighed on the region's markets despite healthy growth in its underlying economies.
Dubai's benchmark index is up 17.6 percent so far this year, exceeding a 14.8 percent gain for the Morgan Stanley Emerging Market index. On the other hand, Abu Dhabi's index has climbed just 8.8 percent and the Saudi benchmark is up only 7.3 percent.
Kuwait, plagued by instability in domestic politics that shows no clear sign of easing despite this month's parliamentary elections, has edged up just 3.0 percent.
Qatar's index is down 4.2 percent, indicating scepticism among investors about the benefits to listed firms of the tiny country's massive infrastructure building plans.
So any hopes for big equities gains across the region next year look over-optimistic. But a substantial amount of money is waiting to enter the markets on dips, which should provide a firm tone in the opening months of 2013, many analysts believe.
"UAE markets will retain a positive tone until the finish of the year, given the overall expectation for equities in 2013," said Anastasios Dalgiannakis, institutional trading manager at Mubasher. "On that basis, I would expect more positive momentum."
The gradual recovery of Dubai's real estate market from its 2008-2010 crash has been one of the Gulf's top financial trends this year.
It has helped shares in leading Dubai property developer Emaar Properties soar 44 percent this year, and with that stock now close to this year's high, it appears possible for the rally to continue.
Dubai is "emerging as the clear favourite among major real estate investors across the MENA region. There are indications that some of the lessons of the last real estate crisis have been learned," consultants Jones Lang LaSalle said in a report this week.
"The most important of these is the need to adopt a long-term and coordinated approach, rather than developing too much real estate too quickly. Providing this increase in confidence does not result in negative over-exuberance, it is likely that most sectors will continue to experience some growth in prices and rentals in 2013."
Another factor sustaining the UAE is high expected dividend payouts for some stocks. Air Arabia is among the favourites, with a forecast dividend yield for 2012 of 7.5 percent, according to analysts; Abu Dhabi Commercial Bank is expected to pay a 5.8 percent yield.
Companies usually announce their annual dividends during the first-quarter earnings reporting season that starts in January.
"I'm very bullish on Q1 2013. Dubai and Abu Dhabi's markets tend to rally in the first few weeks of the year, and liquidity always increases as people position for dividends," said Shehzad Janab, head of asset management at Dubai-based Daman.
"We're still relatively cheap and we have the dividend-led uptick coming up."
Dubai's index is currently priced at about 9.5 times expected 2012 earnings and 8.2 times 2013 earnings, according to analyst forecasts.
"From an asset allocation perspective, I have a more sanguine outlook on equities compared to bonds because the relative attractiveness of bonds has declined with yields shrinking in the recent rally," Janab added.
UAE markets however, continue to suffer from low levels of trading activity. This week Al Habtoor Group, one of Dubai's leading family-owned firms, shelved plans to raise as much as $1.6bn through an initial public offer of shares in Dubai next year.
Analysts say stock market conditions have still not recovered enough to be conducive to IPOs. Trading volume on Dubai's bourse so far in 2012 is about 33 billion shares, compared to 106 billion shares traded in all of 2009.
Saudi Arabia, the region's largest equity market, does not lack trading volume; it has exchanged 76.7 billion shares so far this year.
The market has rallied from an 11-month low hit in late November, partly because of hopes for an increase in government spending in the 2013 state budget, which is expected to be released sometime in the next few weeks.
Prospects for the heavily weighted petrochemical sector, which has been hit by weak global economic growth, are likely to limit any further rally.
"We expect the total net income of the ten stocks under our coverage to decline by 17.6 percent year-on-year...in 2012 mainly driven by the weakness in petrochemical demand and selling prices," NCB Capital said in a research note on the sector.
Also, there is speculation that the government could raise the ultra-low domestic selling price for natural gas as soon as next year, to cut waste. The rise would almost certainly be modest, but it could hurt the bottom lines of petrochemical firms which use the gas as a key raw material.
However, banks - the other major sector in Saudi Arabia - are positioned for more gains on the back of solid economic growth and a boom in infrastructure and housing construction, many analysts believe.
"We are expecting 18 percent growth in earnings for banks" this year," said Faisal Al-Othman, portfolio manager at Riyadh-based Arab National Bank. "That puts the 2012 estimated PE at a multiple of 9.2 - still not expensive."