I made this episode in 2022, had been sitting on it for about a year, until I finally had the courage to publish this for you. Whether you're in your car, on a walk, at the gym, or doing your chores, I have one promise to be genuine and help you with your finances. Enjoy listening to the episode of the Dubai Finance Podcast.
Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this. This is a quote by Dave Ramsey the acclaimed personal finance guru. I couldn’t agree more with the same.
Today’s episode is dedicated to Personal Finance, our focus is to understand the different Savings and Investment Avenues in the UAE.
Ladies and gentlemen, my fellow listeners, it’s my privilege to be your host from Dubai. My name is Divesh, and I welcome you to episode 2 of the Dubai Finance Podcast.
Savings
In the last episode, we touched upon the importance of tracking expenses, making a budget and allocating savings first towards a contingency fund and later towards investments. Today we dive a little deeper.
In personal finance, there’s a rule called the 50/30/20 rule. You shouldn’t have to be spending more than 50% of your income towards Essentials like, Food, Clothing, Housing, Education for kids, if you do, you’re actually living beyond your means. Next, Wants include lifestyle choice related spends like Streaming Services, Dining out, Gaming expenses. These should not exceed 30%. Finally, the remaining 20% of income should cover your Debt repayments and Savings. You must try to save at least 10% of your monthly income and keep debt repayments preferably lower than 10%.
To help you along in your journey, I have a Free Personal Finance and IPO Cheat sheet that I like to use and highly recommend on my website, that’s free for you to use as a signup bonus. Check it out at dubaifinancepodcast.com.
Now, contingency funds are used at the time of emergencies, that’s why they’re also called emergency funds interchangeably. The key requirement is, ease of access to withdraw funds with little to no volatility of the amount that is saved. Savings Banks on average offer between the range of 0.1% to 2% at present. The higher rates provided by Banks in most cases have higher minimum balance requirements. Alright, Savings Accounts are a good way to keep your contingency funds stashed at arm’s length, and without lying idle. When it comes to deciding which bank, you need to consider to open a Savings Account, I would say there are three key requirements, firstly the Bank should be stable and a financially sound institution. You don’t want to have to sweat over whether a Bank will go Bankrupt and money will be locked in. It’s happened before during the 2008 recession, there were 25 banks that failed in the US as per a Fed report. In the UAE, we have Banks like CitiBank, or HSBC or Standard Chartered to name a few of the largest International Banks with strong financials, being publicly traded, you can download and review their financials to see how they stack up and then there are Local Banks, like ADCB and Emirates NBD. Depending on your preference, you could go either international or local. In my experience, local banks are good in terms of Customer service towards Retail customers like you and me, while International Banks are more focussed on Large Businesses and HNIs, hence their customer service may not be the greatest for individuals.
Among local banks, look for those that have a majority holding by either the Government directly or by an Investment Company led by a government such as Dubai or Abu Dhabi. As an example, I can tell you Emirates NBD has 55.76% holding by the Investment Corporation of Dubai, which is the Sovereign Wealth fund of the Govt. of Dubai. This information is publicly available on DFM’s site, you can access the Show Notes for the links and references (DFM, n.d.). (Investment Corporation of Dubai Wikipedia, n.d.).
Secondly, figure out the Interest Rates offered and the Minimum Balance or Salary transfer requirements to find out which Bank is preferable. You can do this analysis by viewing a comparison site like PolicyBazaar.com and perform a search. Lastly, find out the quality of Customer Service, go over Google Reviews, App Reviews and Word of Mouth experiences of friends and family.
Alright, ever had that feeling that your money in the bank doesn’t stack up with your expenses? Or you expected to have saved a bit more? You’re not alone, we’ve all been there, multiple times, a big culprit here is Inflation. Inflation acts as a silent intruder in our lives, steadily raising our cost of living, and shrinking our Savings.
If we look at the data on Inflation in the UAE in the second quarter of 2022 on Trading Economics (Economics, 2022), it stands at 6.77%, up from 3.43% in Q1. While this may sound high, it is lower than the Global Average of 8.8% in 2022 as posted by the International Monetary Fund or IMF.
In this way, it’s possible to actually lose money, if most of your savings are stashed away in a Savings account, worse still in a Current account. Once contingency funds are covered, the next step should be towards building a pool of investments in different asset classes. It’s okay to start small, but it pays to be systematic and regular.
I’ve learnt the hard way, having squandered money buying useless things out of a whim, and hoarding it only to question myself later, what was the point of it all? We’re all human, and it’s easy to fall prey to FOMO and excessive consumerism. It’s best done in moderation, while trying to find ways to add to your income through wise investments. Albert Einstein once said Compound Interest is the eighth wonder of the world, the one who understands it, earns it, he who doesn’t pays it. Apart from building a contingency fund for 6 months in a Savings Account, I would save another 6 months’ worth of expenses in a secondary asset class like Savings Bonds, for three reasons, one is for diversification benefit, second is possibility of better return overall, and the third reason is, 1 year worth of savings is better than 6 months to cover life’s emergencies.
In any case, it pays to have financial prudence, and discipline, to achieve this, one excellent tool I’ve used over the years is recurring deposits. This puts the process of allocating money on autopilot towards building a contingency fund. You set the terms, the amount, the term, the frequency, and voila, you are building a contingency fund, just like paying EMIs or instalments for things you bought in the past, you instead are literally paying yourself forward, while earning interest rather than paying it. Once the deposit matures, you transfer the amount saved to your savings account and only revisit contingency funds at the end of each year. Even though we haven’t covered opening recurring deposit, I would recommend opening such a deposit in the same Bank where you intend to have your Savings Account. Although nearly all Banks should provide this facility, it’s best to check with them before you open an account just to be sure.
National Bonds – Savings
We’re nearly there in terms of contingency funds. There’s just one more item I’d like to talk about, and that’s National Bonds. They are a government owned Entity that issue savings solutions, the most common being Savings Bonds. This is a Sharia compliant product, as mentioned on their FAQs page, and it has a floating rate of return paid as Profit. Last year, Savings Bonds provided 1.5% return, which is comparable to a Premium Savings Account from leading Banks. The minimum amount of investment is quite low though, this is at AED 100, which gets you 10 Certificates worth 10 Dirhams each. A word of caution, Profit earning is unlike a regular savings account, investors are incentivized to hold bonds for longer periods to avail higher rates of Profit. From what I understand, if Bonds are redeemed during a calendar year after being held over 360 days, you get 100% of Profit accrued, between 180-360 days, it comes down to 80%, for 90-180 its 60%, 0-90 it’s 40%. Overall, this is a worthy alternative to Premium Savings Accounts, with similar return or higher, and with a much lower requirement for minimum amount invested. There’s one more thing, once you own Savings Bonds, you participate in a Rewards Program. This gives you the chance to win luxury cars and cash prizes yearly. Now, I am not usually in favour of raffle draws, but when this is at zero additional cost, there’s no risk involved, so it can’t hurt.
UAE Stock Market – Overview and how to setup a Brokerage Account
The UAE has a growing Capital market and has three Stock Exchanges currently operating within the country. These are Abu Securities Exchange or ADX, Dubai Financial Market – DFM and NASDAQ Dubai. Many prominent companies, covering a wide range of industries, such as Banks, Utilities, Real Estate are listed on ADX and DFM. Today I’d like to cover DFM for you. Let’s take a look at the market performance of its main index DFMGI. Since January 2012 to January 2022, the index has gone from a value of 2,492 to 3,329. That’s an increase of 33.6% over 10 years, including the pandemic hit years, and despite other global recession pressures, like the Ukraine conflict, otherwise performance would have been better, no question. Anyway, this increase, amounts to an annualized growth rate or CAGR of about 2.9%. To put things into perspective, let’s look at a scenario of an investor managing her savings of monthly AED 1,000. If she had kept this in a Current account, over 10 years, the amount today would come to AED 120k, that’s easy, 1000 Dirhams over 12 months over 10 years. Assuming she saved this in a regular savings account, with 0.5% average annual interest, it would total to AED 123k, not a huge difference, but 3k additional is better than nothing for sure. Next, had she invested this in the Stock market, the total would have been AED 139,641.78. That’s about 19,641 more than the current account, and 16.6k more than the Savings account, which packs quite a punch. Needless to say, in our example we have used a rather small investment value.
While it’s interesting to note the performance of the Index, there are a few questions that come to mind, what are the kinds of products and investments available on DFM? To begin with you can participate by buying stocks of listed companies. Some prominent names are EMAAR, AirArabia, DEWA, Emirates NBD, Dubai Islamic Bank, DU…… and Salik, yes that’s right, the RTA subsidiary responsible to collect your tolls on major roads, like the Sheikh Zayed road, is a company in which you can invest and possibly recover some of that toll money.
DFM as a stock exchange has three indices, these are as we touched upon previously, DFMGI which stands for DFM General Index, DFMSI, which is DFM Sharia Index and the UAEESGI which is an ESG Index. All three indices are calculated by S&P Dow Jones. Does that name sound familiar?
That’s because, it is the company responsible for calculating some of the best-known indices of today, like the S&P 500, the Dow Jones Industrial Average in the US, to name a few. Now, why is this important?
It’s important because an index represents a basket of securities to determine the Market’s true value at any given point in time. Ever hear the term beat the market? Well, the index value is THE market.
If we look at DFMGI, as of 2022 (DFM, 2022) , there are 35 companies whose weighted price determines the price of the index. The top four weighted stocks are DIB, EMAAR, DEWA and Emirates NBD all having a weight of 10% each. The latest report dated 19th December 2022 states individual weights are based on the closing price of the stocks as on 7th December 2022.
Alright, that’s enough equities and indices, here’s what more is available. DFM includes Equity Futures which are derivatives, which are complex securities whose prices are tied to an underlying asset, in layman’s terms. These can be used to trade and make gains on a short-term basis in a speculative manner, or used as a hedging tool against Equities that you already own. Personally, I tend to keep away from Derivatives, as they are quite complex and they are not best suited for gains in the long term. Instead, the next two products available on DFM are what could help as longer-term investments and these are Exchange Traded Funds or ETFs and Real Estate Investment Trusts or REITs. To simplify the definition of an ETF on Investopedia, it is a pooled investment security like a mutual fund, which tracks any given index, but unlike a mutual fund, it can be bought and sold just like a regular stock. The way an ETF Tracks an index is a technical discussion, which wouldn’t add value to our session today. Essentially, and ETF provides returns based on an Index with minimal expense, and can be used as a great asset class in your portfolio providing you the benefit of diversification even without a huge portfolio of stocks, compared to owning stocks that have high beta. For those not familiar, Beta is a measure of how volatile the price of a stock is compared to the movement in the market. By default, a Beta of 1 means, a stock basically provides mirror returns to the market. 1.5 would be high beta, compared to 0.4 being a low beta stock. This is a tool; portfolio managers use to diversify and optimize equity holdings for their clients.
Higher the risk, higher the potential for return, and conversely higher the propensity for losses as well. While no stock ever has an exact Beta of 1, an ETF would come closest. In future episodes, I will cover stocks and ETFs and REITs to understand how they perform relative to the market, as this would help us understand how such investments have performed historically relative to the market.
REITs on the other hand can be defined as companies or Trusts that own Real estate either through direct investment or by financing income generating properties. REITs come in three forms, Equity REITs which directly own real estate thus allowing participation in rental income paid out through dividends periodically or Mortgage REITs that finance Real Estate and generate Interest Income also paid out periodically through Dividends, and Hybrid REITs, these are a mix of Equity and Mortgage REITs.
Real Estate being mostly an illiquid asset is hard to own directly, hence investing indirectly through REITs provides a benefit of liquidity to the buyer. There are a few things to keep in mind though, unlike ETFs that track a given index, and have their prices adjusted to match changes in the underlying index value, REITs don’t necessarily track the price of their underlying investments. It’s rather a function of the demand and supply, that determines the price of a REIT unit. This implies, that while you may benefit through dividend earnings, that can closely resemble income earned by investing in Real Estate, you don’t necessary get the benefit of appreciation in price of the underlying assets. This sort of dilutes the attractiveness of participating in REITs for gaining in value of investment. Additionally, REITs often have high management fees associated due to the active nature of buying and leasing property unlike ETFs which passively track index values, thus requiring lower Management fees.
After hearing all this, if you’re willing to be an investor in DFM, the first thing you’ll need to do is apply for an Investor Number, the setup involves visiting the website of DFM and filling relevant details. Once you have the Investor Number setup, you will then need to open a Brokerage Account with one of the many Brokerage houses including some well-known local Banks like Emirates NBD.
IPOs in the UAE
Let’s take our attention to IPOs for a moment. You might be already familiar with the term IPO, or you’re hearing this for the first time. IPO stands for Initial Public Offering. Fun fact - The Dutch are credited to invent IPOs back in August 1602 when they went to the general public to raise funds for the Dutch East India Company. That’s 4 centuries ago!
Coming back to present day Dubai, several companies have been participants of IPOs in the DFM, some of these have had a lot of marketing done, and were in the news, billboards and radio recently, they were all over the city.
An IPO occurs when a non-public company, goes public. This could be a privately held company or even a government enterprise that was previously held 100% by the Govt now going public. Since late 2021, there have been a few prominent IPOs, namely DEWA and Salik. But why is this important? Should one invest in IPOs or ignore them altogether?
What are the things to consider for you the listener as an investor while planning to invest in an IPO? Let’s tackle the first question, should we invest in an IPO, what are the pros and cons. Firstly, IPO price is the price determined at the IPO process based on a company’s fundamentals. It is the price you pay to participate in an IPO, the number of shares allotted depends on whether an IPO is under or oversubscribed. E.g. if you applied for an IPO for 1000 Shares, and the IPO is undersubscribed, you will get the 1000 shares you enrolled for at the beginning. Conversely, it will be lower. Prior to participating in an IPO, the company’s fundamentals can be reviewed. This can be found in a detailed document known as the Prospectus. It is like a disclosure and marketing document aiming to attract investors to take the leap and fund the IPO.
Remember, the management’s objective is to ensure an IPO is fully subscribed, and the Prospectus although it may contain audited information, is not in itself an audited document by an unbiased third party. What this means is, there tends to management bias which can seem convincing to an untrained eye. This management bias can lead to overvaluation. This is where my cheat sheet can help you. Do check it out later on the website that’s DubaiFinancePodcast.com
It's important that the financial information is thoroughly scrutinized, and you establish a true picture of the company’s potential. This is not as daunting as it may sound, even if you don’t have a Finance and Accounting Background, you can perform simple assessments independently. When the time comes, we will review an IPO on this podcast. Your assessment will set aside the wheat from the chaff. Have you heard of any start-ups that went public on a meteoric IPO value, only to crash shortly after? It happens quite a lot in Tech stocks. In such cases, it’s better to hold on and not invest when there are Red flags identified, either wait until the price drops below the value you determined as the fair value or, don’t invest for the time being, until the market volatility subsides.
One reason for the meteoric valuation is because their investors are mostly private Equities, Venture Capitalists looking to make an exit on a high at the time the company goes public. Remember management bias in the prospectus and related IPO valuation? It’s Greed, plain and simple.
Often times, such companies have weak financial standing despite strong non-financial supporting indicators like User Engagement, Customer Retention, but at the end cash is king. You need to invest, not in Unicorns, but Cash Cows, can you imagine a Cow with a Unicorn horn? What would you call it a CowCorn, a UniCow? What a sight that would be, it’s a billion dollar plus valued startup that generates positive cash flows, and needs investment to either help increase market liquidity due to its strong fundamentals and hence attractiveness, or it’s a lean enterprise that is looking to take the next leap, think of a Bootstrapped profit generating Private company that finally goes public, because the current owners and promoters are no longer able to fund equity investments.
On the other hand, the richly funded tech stock, would now have to find its feet without direct investor funds, and many a times, such stocks take a huge beating early on, only to find their correct valuation determined by Market forces of demand and supply. This has happened to a lot of big named companies, like Facebook, Twitter, Snapchat, in the US. It will continue to happen, hence the need to stay vigilant.
So now that you have reviewed the Prospectus of the company looking to go Public, understood the financials like Assets owned, liabilities held, Working Capital, etc, it’s time to do a back of the envelope Valuation of the company. Compare your valuation of the company with its IPO price, if your value is higher, that means, in your view the company is undervalued and is a good investment. Conversely, it may be overpriced, and you shouldn’t invest your money in it.
Call to Action
Like me, if you’re fascinated by the world of investment and savings opportunities, it’s time you took that first step, whether it’s opening a new Savings Account to establish a contingency fund, or setting up an Investor Account with DFM to make investments in the local market, or to personally review an IPO, I would urge you to take that first step, the sooner the better. If you’ve found the content in this episode do apply it in your financial journey. If you haven’t found this helpful, I would request you to send in your feedback on [email protected] for me to work on your needs and help you better.
I would also urge you to leave a review on any of the listening platforms like Apple, Spotify or Google, that you’re listening to this podcast from. It helps build momentum to what I’m trying to achieve, and motivates me to serve you the listener a lot more frequently. As usual all relevant links and references are saved in the show notes for your ease of access.
Conclusion
Wow what a journey, this brings us to the end of episode 2, as always, if you’ve made it this far, I appreciate you. You are absolutely awesome to come along all the way to the end, and I wish you a great rest of your day, evening or night, and keep crunching those numbers. Bye.
