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Watch the Fed’s next moves for more indications in the UAE

UAE stocks are interesting, even though major world indices such as SPX 500 are high at all times.

The rally in world indices is backed by an ultra-devilish Federal Reserve and talks of new $ 5 test kits from Abbot Laboratories, which have raised hopes of early detection of coronavirus. The diagnosis of the disease will, of course, help control the pandemic.

The DFM closed lower with 0.71 percent and ADX ended the day in the red, with 0.40 percent. Nevertheless, the outlook looks better with investors gradually accepting it as a new norm.

During the Jackson Hole symposium, Fed Chairman Jerome Powell confirmed that the US Federal Reserve will relax its inflation targeting policy. The change in attitude implies that interest rates will not rise for the coming period and will lead to a scenario where inflation is higher than the interest rate.

This means the economy will have negative real returns and it is positive for financial assets.

Under the new policy, the Federal Reserve now expects inflation to rise above 2 percent. As far as monetary policy is concerned, it is very dubious.

Look at the pen

UAE assets will also benefit from Fed policy, given the dirham dollar pen. What is basically happening is the depreciation of the dollar and this should lead to assets becoming more expensive in dollars. In fact, the news is positive for crude oil, the main driver of the UAE economy. The price of crude oil is also supported by the limited OPEC production.

Dismissal

Among the most important corporate news, Salama (Islamic Arab Insurance Co.) announced the exchanges that it had received 66 million Saudi riyals from the sale of 4.5 million shares in Salama Cooperative Insurance Company, a Saudi company. The company still owns 2.5 million shares in the joint venture. The amount is significant; Salama had a turnover of Dh219 million and a net profit of Dh64.8 million in 2019.

The sale of shares is part of Salama’s business plan to focus on the UAE, which obviously has the best fundamentals in GCC because of its diversified economy. Management can also give a portion of the proceeds to shareholders in the form of higher dividends.

Meanwhile, BH Mubasher has been approved as a market maker for the financial market in Dubai, and it should be useful to increase liquidity.

Room with dividends

This year, the dividends declared by the UAE enterprises performed better than expected. Listed companies have so far paid Dh39.94 billion, while in 2019 it amounted to Dh42.51 billion. Businesses have fared better than expected so far, given the severity of the pandemic situation. Nevertheless, 2021 will be a tough slogan for UAE dividend hunters as companies try to save cash flow due to an uncertain environment.

Banks are the most generous among UAE enterprises, and they are likely to reduce payments in 2021 until the situation returns to normal. The 12-month successive dividend yield for DFM is 4.25 percent and on ADX it is 5.38 percent.

From a chart perspective, Emirates NBD is above the simple 200-day simple moving average, while FAB has successfully recovered the 50- as well as the 100-day simple moving averages.

With the increase in global risk assets, we can expect the UAE markets to follow suit.

Vijay Valecha is chief investment officer at Century Financial.

Source: Gulf News

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