Fields of green

Despite short term losses, Arab markets are up year-to-date

Dubai World Trade Center
Towering over the region (Basil D Sioufi | Wikipedia | CC BY-SA 3.0)

Although the MSCI EM and EFM indices implied a bad month for emerging and frontier markets, with losses of 7.6 percent and 7.4 percent respectively for September, and although both indices were barely above water for the nine months ending on September 30, this tristesse did not reflect the performance of Arab markets in the first three quarters of 2014. With year-to-date index gains ranging from 4.8 percent in Kuwait to 53 percent in Dubai, the first nine months of 2014 showed green arrows for all Arab markets, despite geopolitical specters, regional security concerns, local corrections and confusions caused by lack of transparency and governance.

The third quarter concluded with concerns over terrorism and increasing violence. Most securities markets in the five Arab countries that enrolled in President Barack Obama’s new aerial campaign against the Islamic State of Iraq and Syria (ISIS) moved lower in week 39 as coalition aircraft flew sorties against the terrorist organization’s military positions and infrastructures. However, drops in the two markets with the biggest losses in week 39 were not extraordinary in size and index performances in Arab markets did not show a very different picture for coalition and non-coalition countries.

Coalition members Qatar and Saudi Arabia saw the largest index losses at 3.3 percent and 2.7 percent, followed by losses in both UAE markets and a small drop in the Amman Stock Exchange’s general index. Bahrain, a coalition member, edged up, as did non-coalition countries Morocco, Lebanon and Kuwait with weekly index gains ranging from 0.1 to 0.9 percent. Egypt and Tunis, neither being a coalition member, retreated by 0.3 percent each. With these overall anti-dramatic percentages, the region’s markets were far away from an ISIS fear fest.

Equally, the region’s securities performed anticyclical to constant utterances in the year-to-date that saw many observers talk up emerging market risks. The DFM general index was not only the region’s best performer for the nine months ending on September 30, despite its month-long brush with bearishness in June. It was also the strongest gainer on a 12 month view, having risen by 86.7 percent from the end of Q3 2013. With hype appearing to be a defining element of both Dubai and its financial market, the outlook for the DFM’s fourth quarter is certainly titillating, given the latest trading debut and the final pricing of the Emaar Malls Group IPO which both came at the end of Q3.

The trading debut of retail group Marka on September 25, after a greenfield IPO offering earlier in 2014, saw the stock leap 59 percent on its first day. EMG, which announced its trading debut for October 2, was priced on September 29 at AED 2.90 ($0.79) at the top of the offering range. This implies a market cap above $10 billion for the company whose flagship asset is Dubai Mall. Plus, in another announcement of an impending greenfield IPO, investors are being wooed by a startup healthcare and education player called Amanat. The company’s founders said on September 30 that they will conduct an offering worth $374 million for 55 percent in the group’s capital.

The DFM GI’s top index performance was followed by Egypt’s EGX 30 index, which closed the third quarter with a gain of 47 percent versus the start of 2014 and a 77.9 percent rise when compared to a year ago. A softening of the EGX 30 in the last few sessions of September was attributed to profit booking plus slumping demand ahead of public holidays.

The Egyptian market’s performance is only explicable in the context of the massive trust which local and international financial elites have placed in the government of President Abdel Fattah al-Sisi and his towering influence over the country’s course. The populace matched this trust by rushing to provide 61 billion Egyptian pounds ($8.5 billion) for the government’s Suez Canal expansion project within less than two weeks via purchases of investment certificates last month.

With retail investors having contributed 82 percent of this funding according to the Egyptian Central Bank, the ball is now squarely in the Egyptian government’s court, which has about 10 months to go in Sisi’s proclaimed timeline for digging the new canal segments. Furthermore, we should not forget the government’s wider need to deliver the sort of stability that will continue to buoy the stocks of real estate developers and financial, manufacturing and telecommunications companies that figure importantly in the EGX 30 index.

The Qatar Exchange Index and the Saudi Stock Exchange’s TASI were third and fourth in the regional list of year-to-date gainers, respectively reporting improvements of 38 percent and 30.9 percent between the start of 2014 and end of September. The market in Doha had an interesting third quarter, which started with recovery from the June slump that had been induced by the Dubai market. Although it included pockets of volatility, Doha’s Q3 growth continued beyond the index level reached before the June crisis and scaled a new all time high on September 18 before some profit taking at the end of the quarter.

The TASI, which corrected similarly at the end of September, is up 40.5 percent when compared with 12 months ago and currently looks set to have one of the stronger years in its history of, at times, turbulent performance over the past two decades.

All remaining MENA markets closed the first nine months in 2014 also in positive territory. This includes the Kuwait Stock Exchange, whose index had toed the line for some stretches of the year; however, good performance in the third quarter facilitated the positive close of the period.

Double digit growth was not limited to the four best performing MENA indices but also entailed another quartet. Bahrain gained 24.1 percent and Abu Dhabi 23.1; Morocco improved 15.5 percent and reached a new 27 month high at the end of Q3. The rise in Oman’s MSM 30 index cooled a bit in September when compared with the two previous months but its 14 percent year-to-date increase was nothing to scoff at.

Going into single digit growers, the Tunisian bourse saw its Tunindex drop 2.1 percent in September but was 6.1 percent up year-to-date. In Lebanon, the Beirut Stock Exchange was certainly not spoiled with political progress but the BLOM Index closed September up 6.5 percent from the start of the year. In Jordan, the Amman Stock Exchange Index achieved 6 percent year-to-date growth.

In September, the ASE exhibited no strong fluctuations and softened 0.8 percent, which is noteworthy and perhaps positively unusual considering how various pressures have been reflecting on the country’s listed companies. In one notable issue, the Amman bourse’s top company by market cap, Arab Bank, took a beating in an American civil lawsuit on September 22 as a jury at the Federal District Court in Brooklyn declared the bank culpable for financial support of terrorism.

The shares of Arab Bank, which declared on September 23 that it would appeal the judgment, opened about 7 percent lower on the morning after the verdict but recovered most of this loss very quickly. However, the market values the bank — whose largest shareholders are from the Hariri family — only at about a third of where the stock traded in summer of 2008. The brief pressure on the share price may be a reminder that a final judgment against Arab Bank could impact not only the biggest Jordanian bank but have troubling implications for the regional banking industry.

Another listed Jordanian company whose operational and financial performance figures last month demonstrated the challenges of economic duress created by regional conflict was the Hashemite Kingdom’s national carrier, Royal Jordanian. At its annual meeting in late September, the airline reported for 2013 a 3 percent decline in passenger numbers and a 7 percent decline in revenues. The company’s news release did not even mention how profits developed in 2013, but noted that the carrier completely closed down six routes in 2013 and suspended or reduced flights to other key destinations, including Beirut. Compared to the stock’s best days in March 2008, Royal Jordanian shares closed the third quarter in 2014 trading at only about 10 percent of the price from then.

Thomas Schellen

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