Four seem confusing, one is asleep, five are quite small, but three are standing tall, doing better than ever — ‘tis not a legend to a treasure map of Captain Jack Sparrow, this; ‘tis the Arab stock markets in the first half of 2007.
From the start of the year until the end of July, the indices of three major Arab equity markets — the Abu Dhabi Securities Market, the Kuwait Stock Exchange, and the Cairo & Alexandria Exchanges — have moved up beyond most expectations, with gains in the range of 20% to 25%.
The KSE and CASE achieved new historic records last month as their rallies drove them above the highs they had achieved in the days of the regional bubble that peaked between autumn of 2005 and February of 2006.
On a two-year performance check, CASE is up nearly 80% when compared with the end of July 2005, KSE is up 40%, ADSM, however, is down by a quarter of its index. Like its twin in Dubai and the neighbor in Doha, the Abu Dhabi bourse had its till now top valuation days in the second half of 2005. The largest of the region’s exchanges, Riyadh’s Saudi Stock Exchange, is down by more than 40% in two-year comparison and — after some gains in July — reduced its losses for the first seven months of this year to less than 5%.
The big black stallion in MENA markets in the first half of 2007 has to be Egypt. Its EFG Hermes Index tested the barrier of 75,000 points in the second half of last month, reaching more than 7% higher than its previous record highs from February 2006. In the way of dark horses, attention possibly deserved by the CASE case was sucked up by the on-going Dubai hype and the fascination of GCC as the main stage in the current Arabian economic miracle.
Credit Suisse favors GCC markets
Swiss wealth maker Credit Suisse (CS) blew its investment horn heavily for the Gulf last month in producing its debut in-depth report on the GCC markets, calling them “the most attractive globally on cash flow and dividend yield metrics.” Besides being very profitable, listed companies in the GCC on average have low debt. For enterprise multiple — the cost of a company expressed as ratio of enterprise value to earnings before interest, tax, depreciation, and amortization — the GCC are currently the cheapest markets worldwide, CS added.
The bank favored the GCC even more on basis of its latest oil price forecast; CS updated its outlook for benchmark crude (West Texas Intermediate) to average $62.5 per barrel through 2010. Its investment advice for GCC portfolio holders is allocation of 40% (market weight) to the SSE, 27% to the UAE (33% overweight), 19% to Kuwait (30% underweight) and 14% to Qatar (27% overweight against its share in the MSCI GCC index).
The weighting reflects that the Kuwaiti market has sped ahead of Saudi Arabia, Qatar, and the UAE in stock price levels. The Bahraini and Omani markets, which also rose to new record highs in recent weeks, do not figure in the hefty CS research and recommendation paper; their combined weight in the MSCI GCC index is only 2%, since they have significant size handicaps against their GCC peers with the exception of the region’s expatriate bourse, DIFC, that has nailed down the role as the world’s largest listing place for Sukuk but still rests in anticipation of its kiss of life for equities.
With all the enthusiasm about Gulf equity markets, it is an enticing profitability play that a theoretical investor in index-tracking stock on the Egyptian exchange would embark on his 2007 summer holidays with his portfolio value about 120 percentage points ahead versus the Saudi bourse’s Tadawul All Shares Index if he bought and held shares from the end of July 2005 to the end of the same month in 2007.
Full-month volumes on the Egyptian bourse in June reached 641,911 transactions and exceeded 1 billion traded securities. The value of trades was close to $5.8 billion, of which 4% were over-the-counter trades.
The first-half year rally of CASE was more than many local observers had dared to hope for at the beginning of 2007 when a magazine report in January said all that investors in Egypt could wish for were political stability and another market rally — “but that might be asking for too much.”
Regional investment firms, while taking a positive look on Egypt overall, expressed some polarization in their views on the Nile republic versus the GCC. In its regional outlook published in April, Dubai’s Rasmala Investments was bullish on CASE saying that the capital market is situated for gains because of privatization benefits and infrastructure investments.
Risk sensitivities
Shuaa Capital across town was a bit more kittenish, asserting its positive view on Egypt in the long term but stating the firm had pulled away from the market because of concerns over a valuation parity mismatch with the GCC and fears of Egypt becoming engulfed in a wider emerging markets sell-off.
In the three months since Shuaa published their spring assessment which named the UAE as their first market pick and the Saudi market the second, the Dubai Financial Market and the ADSM have done well with respective index gains of 14% and 16%. But the SSE moved up by barely 5%, and that only thanks an upward push in the second half of July, while CASE’s Hermes Index kept rolling with a three-month rise of over 13%.
As de-facto standalone paladin of the international equity game in North Africa (the much younger bourses of Tunis and Casablanca are no comparable partners at this time) Egypt has concerns over influence of international market swings on its prices, perhaps more so than the GCC where mutual dynamics can play out stronger.
People are getting more sensitive to risk, according to a ruling consensus among analysts who have gauged the credit, equity, and bond developments on large global markets in the past five months. This increased caution also could transmit distant market jitters to bourses in the Middle East in conjunction with the overall growing trend of global interaction of investor sentiments.
Credit Suisse July 2007 Top Stock Picks for the GCC
Coming as a timely reminder of this was Wall Street’s second-worst day of 2007 to that date on July 26 which sent the Dow lower by 311 points. Coming shortly after the New York Stock Exchange set new records, the market quiver radiated into other major markets where Japan’s Nikkei and other Asian bourses went lower the next day.
In their first responses, analysts evaluated the drop in the Dow as significant because of the high volumes of trade involved, which signaled selling by institutional investors. Without attempting any soothsaying about US markets in the remainder of 2007, the fluctuations on Wall Street are noteworthy symptoms of the increasing globalization of major equity markets that also was behind the year’s sharpest drop in the US market index at the end of February.
Back then, it was nervousness on China’s Shanghai market that triggered a wave of slides from the East to the West, ending with a drop on Wall Street. The end-July jitters traveled in the reverse direction, but immediately led experts to speak of a domino effect, raising just the same questions over growing international cross influences of market movements as the February tremor had done.
The Middle Eastern exchanges were not much affected by the February slump and because of the Islamic weekend had a time insulation benefit from the late-July drop which fell on a Thursday/Friday. However, intensification of global market developments and their influences on regional markets can be expected.
Accessibility to foreign investors needed
Looking at it from another angle, the accessibility of the region’s equity markets to foreign investors is worth wondering about in the positive sense. CASE statistics, in June, said foreign investors supplied 31% of the exchange’s total market value traded. An important factor in Egypt’s rally has been the economy’s platform of reform, privatization and improving of attractiveness to international players.
The announced intention to sell 80% Banque du Caire by the Egyptian government last month was a major case in point, leading — despite an outpouring of local concerns over selling out to foreigners — to immediate reports of international interest in buying the bank.
On the other hand, most of the top stock picks which CS presented in its review of the GCC markets had the drawback of not being open to foreign investors. Some blue chip stocks in the GCC that have been given mouth-watering upsides of well over 50% by local and international analysts are not available to non-GCC buyers.
In light of the performance differences between the privatization and diversification driven uptrend of CASE and the heavily oil-dependent path of the restrictive Saudi market, it is worth asking if GCC equity markets in 2007 have sacrificed significant valuation gain potentials through their access policies which barred sophisticated international investors from making moves on what they identified as the end of the correction phase that followed the initial Gulf equities bubble.
Also an open question is to how much the Middle East can be knitted into a sufficiently coherent fabric of equity markets, trade and services. Over half a century of political proclamations of Arab free trade have not panned out, today’s private sector web of financial firms and investment relations is the intriguing show. To give just one small example for this integration, UAE investment firm Abraaj Capital owns 20% in Egypt’s EFG Hermes which owns 25% in Lebanon’s Banque Audi.
What is still missing is the joint platform of a true regional bourse — but with a load of political agreements needed and the ratio of magnanimous announcements to concrete steps in that direction waking musings on the actual international willingness to acknowledge the Palestinian state, all short-term bets on the joint Arab bourse option should be in Monopoly money.
