Equity Risk Premium for the United Arab Emirates - January 2019 kpmg.com/ae kpmg.com/om - assets.kpmg
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Equity Risk Premium for the United Arab Emirates January 2019 kpmg.com/ae kpmg.com/om
Equity Risk Premium for
the United Arab Emirates
The KPMG Lower Gulf valuation team continually the risk-free rate. It represents the additional return
endeavors to carry out independent in-house research investors require from an equity investment to reflect the
on valuation-related matters. This document contains additional risk in the asset compared to a ‘risk-free’ asset.
a summary of our recent observations and possible
Despite the relatively straight forward nature of the
inferences on one key valuation parameter, the Equity
ERP concept, its derivation is more complicated, as
Risk Premium (ERP) in the United Arab Emirates (UAE),
practitioners use various methods. Three key approaches
used in the derivation of cost of equity for regional
to deriving ERP can be discerned:
businesses. Given the dynamic nature of this crucial
metric, our aim is to derive the ERP on a quarterly basis –– Historical premiums: this methodology assumes
and share the results with a larger audience. that expected ERP can be derived by studying
historical equity returns. Although well established and
theoretically sound, potential for its application in the
UAE is limited due to the lack of a sufficiently long and
Based on our analysis, we detailed history for regional indices.
recommend an ERP of –– Implied premiums: ERP is derived by assessing
7.0% for the UAE as of 30 current prices, growth, and return expectations. This
methodology is also well established and theoretically
September 2018. sound, and furthermore allows for incorporation of
the most recent market developments. It is, however,
sensitive to the inputs used.
UAE economic outlook –– Survey premiums: surveys provide study participants’
It appears that the UAE’s GDP growth has comparatively current views.
slowed in recent years, driven by falling oil prices,
Historical ERP findings
the general slow down in the global economy, and a
Historically, over the last few years, ERP appears to
challenging geo-political situation in the Middle East and
have ranged between ~4.5% - ~7.5% for developed
in some large economies around the world. Despite
markets. This is based on estimates and surveys
these factors, the UAE’s GDP growth is expected to
of various practitioners and academics, including
improve in the near future, driven by factors including
Damodaran, Fernandez, and global KPMG research.
continued economic diversification geared toward further
While data for the GCC region is more limited, the range
reducing dependence on the petroleum sector, an
over the last three years appears to have been ~5.5% -
increase in government spending, stronger fiscal position
9%, excluding outliers.
driven by the introduction of VAT and an increase in oil
prices.
General concept
The ERP is the excess return of the stock market over
KPMG methodology –– The risk-free rate has been developed using 20-year
Our model is based on the implied premium methodology US government bond yields, adjusted for inflation
and calculates the potential returns of the market. differential and country risk premium for the UAE.
Key assumptions for the UAE Limitations of the methodology
–– KPMG’s ‘market’ has been selected from the equity stocks The results of the exercise are dependent on the
listed on Dubai Financial Market, Abu Dhabi Securities inputs used, including the selection of income or return
Exchange, Nasdaq Dubai, and the MSCI UAE Index. proxies (e.g. dividends, buy-backs, cash flow) and the
basis of expected growth rates (e.g. macroeconomic
The selected KPMG index consists of: considerations, consensus forecast estimates). Further,
49+51+I 27+73+I
as the UAE market deepens, it continues to face some
limitations in terms of free float, traded volumes, and
analyst coverage. We will continue to monitor these
factors closely and refine our inputs.
49% 26% Equity Risk Premium for the UAE
Based on our analysis, we recommend an ERP of 7.0%
as of 30 September 2018. Given the increase in bond
Financial services Telecommunication yields driven by Federal Reserve rate hikes, and subdued
17+83+I 13++I87
equity markets and economies, we believe this increase
in ERP demanded by investors vis-à-vis the 31 March
2018 estimate of 6.6% is reasonable.
15% 10% Our estimation is based on information available on 30
September 2018. Developments in the market after
this date can have an impact on the perceived market
Real estate Others risk, which is not reflected in the ERP estimate on 30
September 2018. As a general comment, we would point
out that individual input parameters for a discount rate
The selected KPMG index has been weighted by calculation should never be assessed in isolation.
market capitalization.
Please note that this is a summary document only.
–– Consensus estimates have been considered for Should you require more detailed information on the
estimating returns in the explicit period; long-term growth methodologies used to derive the ERP, please do not
estimates have considered expected long-term growth, hesitate to contact us directly.
as well as inflation expectations for the UAE economy.
Equity Risk Premium for the United Arab Emirates
Contact us
Elias Daou Swetha Sunder Tareck Saade
Head of Corporate Finance Associate Director | Associate | Advisory
KPMG Lower Gulf Limited Advisory KPMG Lower Gulf Limited
T: +971 4403 0352 KPMG Lower Gulf Limited T: +971 4403 0300
E: edaou@kpmg.com T:+971 4403 0371 E: tarecksaade@kpmg.com
E: ssunder@kpmg.com
www.kpmg.com/ae
www.kpmg.com/om
Follow us on: kpmg-mesa
@kpmg_lowergulf
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation. © 2019 KPMG Lower Gulf Limited, operating in the UAE and Oman, member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International. Designed by Creative UAE
Publication name: Equity Risk Premium for the United Arab Emirates
Publication number: J1864
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