SME IPOs key to growth

27/12/2013 08:13 AST

Major UAE stock exchanges such as the Dubai Financial Market (DFM), Nasdaq Dubai and the Abu Dhabi Securities Exchange (ADX) play an important role in attracting investments into businesses whose stocks are traded on these exchanges, according to a recent Dubai Chamber of Commerce and Industry study.

In its analysis about the investment prospects in Dubai and global stock markets in light of the recent strong performance of major stock indices, the study further states that the UAE’s strong economic growth has been accompanied by growth in value of stocks traded on UAE stock exchanges as the value of stocks traded on the Dubai Financial Market (DFM) in the year 2000 was about Dh437 million, while in the first three quarters of 2013 it shot up to Dh107,863 million.

Recent performance

In the long-term, growth in company earnings per share leads to an increase in the value of stock prices while strong economic growth not only increases stock prices but also the company’s earnings per share.

Additionally, research by experts has shown that investors may realise above market stock returns as long as they can buy stocks when valuations are cheap. In the short and medium term, improved investor expectations about future company earnings and increase in equity indices of major economies are some important reasons for the increase in the value of the DFM General Index.

In this regard, the performance of stock indices of major economies has had a positive impact on the DFM’s performance. This is partly because increased globalisation has allowed funds to move across economies more quickly thus increasing equity market correlations.

For example, the US stock index, the S&P 500, has shown strong increase of about 162 per cent from March 3, 2009 to November 8, 2013. The strong performance of the US stock market is partly due to improvement in the future expectations of investors about company earnings and the need for investors to earn a lucrative return on investment.

These positive expectations in major stock markets are also transmitted across to stock markets in the UAE, partly contributing to the strong performance of the DFM General Index, says the study.

Future opportunities

Stocks remain the major source for investment returns for long-term investors as well as the future earning power of the business, its sustainable competitive advantage and the price paid for the investment. In this regard, investors could find potentially lucrative investments in the DFM in sectors ranging from consumer staples to telecommunications.

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