The near instant oversubscription of the LuLu Retail IPO came as little surprise to industry observers, given the groundswell of interest ever since its first intention to float announcement was made months ago.
Given the price range, it will be interesting to see whether the follow-through in the secondary markets will transpire (by all indications it should). But there is little doubt that LuLu will be a fundamental holding of any core emerging markets portfolio in the months ahead, in the way that Salik and Parkin. The latter are by far the highest performers of the DFM IPO bandwagon, despite their relatively ‘boring’ business models.
While they both incorporate AI in their models, that acronym is hardly the first thing that comes to mind when thinking of them. Yet, ever since their listing, they have steadily risen, repeatedly defying calls of analyst price predictions.
There are two fundamental reasons for this:
- Valuations: Despite the doubling of the share price for Salik and Parkin, the growth engine is more than just a population growth story. Or even a dividend yield story. Rather, at its base, it is an inflation hedge, a near perfect one at that, in a city where the cost of living has remained a concern in the runaway rental markets post-Covid.
This, is in the final analysis what capital markets also facilitate. In addition to raising capital, they provide solutions not only for entrepreneurs but also for people with savings in all kinds of macroeconomic environments.
It is of little surprise that some of the best performing stocks worldwide this year have been from the most ‘boring’ of sectors, from utilities to natural gas to oil drillers. And in the case of DFM, toll-booth providers and parking gate meter companies.
- The rise of social media, which in academic studies has actually broken down the efficiency of the stock market (‘The Efficient Market Hypothesis’), in allowing crowds to behave in unison, giving rise to meme stocks.
With access to instantaneous, gamified information under a zero commission structure, the stage is set for casino-like behavior to dominate the zeitgeist (as it has in Western equity markets).
However, the same breakdown of efficiency can also be an advocate for single stock picking. And for even the median investor to realize there are companies amidst the mix that will naturally stand out over the long-term in primary market offerings.
Parkin and Salik have proven that to the investor community at large. In the same way, the market expects LuLu to be more of the same, given its effective harnessing of its business models that generate higher margins.
LuLu will also act as an inflation hedge for its investors, far more than its peers, given its mass market share and this implies that when it comes to investing in capital markets, the traditional mantra of diversification will reduce the earnings potential of any portfolio of stocks.
Instead what is required is a basic understanding of the business that the investor is buying rather than what Warren Buffett describes as ‘the casino that now resides in many homes and daily tempts its occupants’.
It is this loss of relative efficiency that has given rise to valuation dislocations in the market, where valuation bubbles occur more often whilst the hidden gems remain undervalued. A recent Bloomberg article stated that value investing has outperformed the tech sector in only two out of the last 20 years. The solution is to index the sector.
But that strategy is flawed because the acronym that rises with it is ‘HODL’. Or ‘hold on for dear life’. It applies to the low quality, high multiple stocks that collapse with an increasingly higher frequency and then get dumped from the index.
Rather, what Dubai and the UAE has proven is that over statistical time the probability of being wrong with popular stocks is high. That when market drawdowns occur, the ability to hold on to higher multiple stocks disappear, and then value-driven stocks outperform more than 85% of the time.
This is what has happened on DFM and ADX with stocks like Parkin, Salik, the ADNOC offerings. And what is likely to occur with LuLu.
Smart investors should worry about good strategies being arbitraged away. The rise of social media has shown that the strategies that are likely to be arbitraged away for the most part are the ones that are the least desirable. (Meme stocks being the prime example).
In the final analysis, capital allocation should provide solutions to the ones that are providing the capital. The IPO bandwagon in the UAE has shown that the least likely candidates (by ‘buzziness’ indicators) have risen to the top.
If markets have indeed become less efficient then the task of picking stocks like LuLu has become easier. Time will tell.
