A late summer swelter

Regional markets are slowly emerging from their lull

Looking for winners

Arab markets trended up or flat with positive bias at a rate of three to one in the 35th week of the year. Indices were intonating pretty much the same melody of small to moderate gains as in the previous week, but with a swelling in some turnovers in the last trading sessions of August.

Tadawul’s ascent

The top index performer of week 35 and of the entire month of August was Saudi Arabia’s Tadawul. The TASI got its boost from prospects of being able to attract more foreign cash starting the first half of 2015, based on the July 21 cabinet decision to open the doors for direct Tadawul participation by qualifying foreign institutions, and possibly ascend to being covered by the MSCI Emerging Markets (EM) Index in 2017, or some time thereafter.

Including its 2.9 percent gain last week, the TASI rallied by 14 percent between the July 21 announcement and the end of August. The rise in week 35 came after the program for opening the stock market to foreign investors was clarified further by the Capital Market Authority’s release of draft rules on August 21, under which, among other stipulations, foreign market participants need to be institutions with at least five years of experience and a minimum of $3–$5 billion in assets under management.

Factors that also speak in favor of the Saudi numbers are the strong oil price and correlated economic data such as growing banking sector deposits and record net foreign assets held by the Saudi Arabian Monetary Agency, which the kingdom’s central bank just reported as standing at SAR 2.75 trillion ($733 billion) at the end of July, up 7.8 percent year on year.

Risks of overheating in the Saudi market were noted by some analysts as the TASI shot up in August. According to the exchange, price to earnings (P/E) ratios in the important banking and petrochemicals sectors stood at almost 17 at the end of August and reached 18.2 for the market.

Besides top gainer Tadawul, seven of the 12 MENA exchanges moved in positive or flat-to-positive territory in both weeks 35 and 34. Up movements in all these markets were minor, with a 2 percent gain of the DFM General Index in week 34, the best weekly rise. Three small markets — Manama, Tunis and Beirut — experienced swings: in the case of the first two, from limited index gains in week 34 to small losses in week 35. In Beirut, the BLOM Index moved from a minor weekly drop to an even smaller gain.

In the view of analysts contacted by Executive at the time, the demand was linked to a planned increase in the share capital of Lebanon’s largest bank. According to filings made by Bank Audi on August 8 and August 26, the bank’s shareholders convened for an extraordinary general assembly on August 26 which, as could be expected, approved issuance of 50 million new shares. The assembly resolved to give existing shareholders as of the September 1 record date pro rata rights to acquire 40 million of the new shares along with three attached warrants per new share for acquiring shares of Turkish subsidiary Odeabank at a future time.

Statistics published by the Beirut Stock Exchange for August showed a total monthly traded value of $42 million. If the BSE’s $13.5 million traded value on August 21 could be extrapolated into daily activity (sadly, the vigor did not persist even until the next Thursday) on long term basis, the exchange’s cumulative volume of the next 2,000 years would allow the Lebanese capital market to even up to the $6.9 trillion that were traded last year on the New York Stock Exchange.

Confusion in Doha

The only index that took a noteworthy plunge in week 35 was Doha’s QE Index. The weekly dip was on account of selling pressure on August 28, which in turn was driven by transactions related to a small rebalancing in the weighing of three Qatari stocks in the MSCI EM Index. This bit of in and out was instructive on the importance that external decisions can have on market movements in an emerging environment. But the real mischief in the Qatari market actually happened a few days earlier.

At the time, MSCI put its foot in its mouth by saying in an August 13 press release that Doha listed Mesaieed Petrochemicals would be one of three additions to the MSCI EM Index, along with a Polish and a South African stock. As such, Mesaieed was named as the only regional stock to be newly included in the MSCI EM Index and also in the MSCI ACWI Growth Index.

But MSCI reversed its decision only a day later. This in and out was reflected in the stock’s volatile movements, and not to the company’s delight. As Mesaieed Petrochemicals said on August 17 in a response to stock price movements, the company saw its strength as “driven by its own performance and not by MSCI Inc. decisions.”

Mesaieed, a subsidiary of Qatar Petroleum, was floated on the QE at the end of February 2014 in an IPO that saw the company’s stock shoot up from the 10 riyal issue price to a first day close of 55 riyals. In response to the MSCI inclusion announcement, the stock’s trade volume peaked above 7.7 million shares on August 14 and the share closed the trading week 16 percent higher.

Since August 17, it has almost come back down to August 10 levels, looking like a losing bet for eventual retail investors who bought the stock on MSCI’s dud inclusion announcement. Of course, MSCI publishes these announcements with a 55 line disclaimer that entails, among countless other exclusions, limitations, caveats and alerts to propriety, the fine sentence, “The user of the information assumes the entire risk of any use it may make or permit to be made of the information.”

Noisemakers

But to end August with an upbeat tune was to be left to the conductors of the bigger economic expansion plays. Announcers of capitalism from Cairo (public sector) and Dubai (private, ahem, sector) quite unsurprisingly used the last day of August for fielding PR marching bands with bass drums and crash cymbals, making as much noise as possible.

The one noisemaker was the Egyptian orchestration of economic revenue growth from its Suez Canal expansion project. The country’s central bank governor on August 31 intonated additional patriotic financial notes in describing the — yet to be implemented — investment certificates that are to be offered shortly by several state owned commercial banks to domestic investors. According to reports based on a press conference by central bank governor Hisham Ramez, the bonds will be aiming to raise EGP 60 billion ($8.4 billion) in a first round of canal finance from Egyptians and qualifying local entities.

Certificates will be offered starting as low as EGP 10 ($1.40). There were conflicting media reports if expatriate Egyptians would be offered a dollar denominated version. The coupon rate apparently will be set at 12 percent for the EGP denominated certificates; interest for the low-value certificates will be paid at maturity but coupons will be redeemable on quarterly basis for the higher denominated bonds.

However, current plans seem to say that there will be no secondary market. The Central Bank of Egypt’s website on September 1 did not provide an official statement on the investment bond issuance and its conditions; however, the bank’s website provided a reference to the latest Consumer Price Index development, according to which Egypt’s annual headline CPI inflation reached 11.04 percent for July 2014 and annual core CPI inflation widened to 9.57 percent — not far off the bonds’ 12 percent coupon rate.

The least shocking surprise of the month finally came from Dubai, where Emaar Properties assured with stock market disclosures and press releases that the world heard about its news that the flotation of its Malls Unit on the Dubai Financial Market would take place in September.

The announcement followed upon an announcement from earlier in the month in which the company had described media reports implying a flotation in September as “purely speculative.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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