A mixed bag on the MENA equity markets in May
Regional diversity and the lack of correlation to global capital markets characterized the region’s equity market performance in May 2008, according to a research report issued by leading regional investment bank Rasmala.
The broad MENA market index was approximately 4% lower for the month of May with a large dispersion of performances among the region’s bourses. “Weak performances in the large Saudi Arabian and Egyptian markets were fundamental to the regional index decline,” explained Khaled Al Masri, Partner, Asset Management at Rasmala. “The Egyptian market in particular suffered several set-backs and ended over 6% lower. The Central Bank continued to increase interest rates to fight the social effects of inflation and prices of several strategic food and industrial commodities were sharply higher threatening domestic demand and stability. Rumours of new taxes on stock market investments also weighed on the Egyptian market.”
Other regional markets such as Kuwait, Oman, Qatar, Jordan and Lebanon enjoyed good performances. Oman’s 3% monthly gain re-affirmed the market’s leadership of the MENA equity markets for 2008 while Qatar’s 5% gain year to date cemented it’s place amongst the top three MENA markets this year.
Within the GCC economies, the debate over the currency peg to the USD intensified as the UAE reported that inflation in 2007 surged to over 14% with money supply growing by over 37% and similar situations being reported around the GCC region. “It is interesting to note that Kuwait, which has more flexibility in its monetary and currency policy than its neighbors, has had limited success in controlling inflation,” concluded Masri. “This vindicates our view that regional inflationary pressures are primarily due to a world-wide phenomena of higher food prices as well as the regional economic boom leading to higher demand for goods and services – particularly housing.”
Markets in summary
• Secondary market remains weak, but primary market robust
• Substantial domestic liquidity being directed towards the heavy pipe-line of initial offerings which investors are expecting to provide higher profit growth than listed blue chips.
• Year-to-date, SAR 24 billion (USD 6.4 billion) has been raised for IPO’s compared to SAR 19.2 billion (USD 5.1 billion) for the whole of 2007.
“While there is a long term positive in increasing market depth and adding several strategic sectors to the public market, the short term effect has been to divert liquidity from the secondary market. This is in contrast to other regional markets where the supply-demand situation for stocks is much less balanced and domestic and foreign liquidity continues to chase relatively few stocks.” Khaled Al Masri, Partner, Asset Management, Rasmala
• The Dubai Financial Market (DFM) lost around 1% while the Abu Dhabi Securities Market (ADSM) gained around 1%
• The Dubai market was pressured by the continuing lack-lustre performance of heavy weight EMAAR which was slightly lower over the month
• The ADSM gains of around 1% were especially impressive as market heavy weight, Etisalat (telecom) lost ground over the month. Strong performances in banking stocks compensated for this as did the Abu Dhabi cement sector which was boosted by the news that a major export market, Oman, had lifted the price cap on cement by 13% at the end of May.
“The UAE is a perfect example of the overall disparity found across the regional market at the moment. We would expect that earnings releases during July will be the catalyst to energize the markets and move them higher.” Khaled Al Masri, Partner, Asset Management, Rasmala
• The Kuwaiti market continued to post steady gains and move higher after gaining over 2% in May.
• But the market suffered some profit taking as investors seemed disappointed by the outcome of the Parliamentary elections and there were fears of profit growth in the banking sector as the Central Bank restricted bank lending to try and control money supply growth and inflation.
“The Kuwaiti market enjoys some of the best regional valuations at just over 12 times estimated 2008 earnings, dividend yields of 3% and price-book ratios of below three. The market is eagerly awaiting 2nd quarter earnings releases to confirm the attractiveness of the current valuations at which point the market can be expected to move higher.” Khaled Al Masri, Partner, Asset Management, Rasmala
• 5% - 10% rallies in market leaders Industries Qatar, Qatar Gas, Qatar National Bank and Doha Bank helped the Qatari market reach 30 month highs before some profit taking in the last week.
• The market ended the month over 5% higher making it the second best performing GCC market in 2008 (after Oman).
• The catalyst for the strong performance was reports of strong 2nd quarter results from market leader, Industries Qatar.
“Earnings growth for Qatari companies is expected to be amongst the highest in the region on the back of an unprecedented economic boom, but even with the forecast growth, earnings multiples are currently close to 19 times 2008 estimated earnings, making this the most expensive regional market. The market will continue to be supported by the small supply of stocks and low foreign ownership limits with local and foreign liquidity chasing only a handful of stocks in the fastest growing regional economy.” Khaled Al Masri, Partner, Asset Management, Rasmala
• The Omani market continued its amazing multi-year run and after the 3% gain in May, is close to 28% higher for the year making it the top MENA market in 2008.
• Trading volumes on the Muscat Securities Market were strong and markedly higher than their historical average which is a healthy sign for this market.
“The market enjoys broad institutional support from local pension funds and offers valuable diversification benefits within a regional investment portfolio making it still attractive despite the continuing rally.” Khaled Al Masri, Partner, Asset Management, Rasmala
• The Egyptian market suffered during May as a combination of higher interest rates, jittery global markets, rumors of new taxes on investments and worrying increases in the price of strategic food and industrial commodities weighed heavily on the market.
“The market recovered towards the end of the month as the regulator (CMA) and the Minister of Investment denied rumors of new taxes being imposed on stock market investments.” Khaled Al Masri, Partner, Asset Management, Rasmala