Morgan Stanley bullish on Middle East Equity Markets

Morgan Stanley (NYSE: MS) has initiated coverage of the Middle Eastern equity markets with a clear ‘overweight’ recommendation on the region, with the UAE, Kuwait and Qatar as the firm’s preferred country exposure.

Morgan Stanley estimates that GDP for the Gulf Cooperation Council (GCC) plus Egypt and Jordan will reach $957 billion in 2007 and $1,045 billion in 2008, more than twice the 2002 figure of $484 billion and approximately the same size as the Indian economy.

In the report, “Middle Eastern Equity Markets: Clear Overweight,” Jonathan Garner, Global Emerging Market Strategist at Morgan Stanley, says that the equity markets are likely to perform well in 2008 for a number of reasons. “The strong macro-economic backdrop in the region, driven by high oil prices, increased investment and strong domestic demand, combined with an anticipated improvement in company earnings and current attractive valuations, suggest that the region’s equity markets are likely to outperform the MSCI Emerging Markets index.

“We expect earnings growth for the region to bounce back in 2008 to over 15% from 7% in 2007,” said Mr. Garner.

The reports says that, from a valuation perspective, the MSCI Arabian Markets index trades at a 15% discount to the MSCI Emerging Markets index, with the dividend yield for the region, at 3.2%, is 130 bps higher than the MSCI Emerging Markets index.

The UAE, Qatar and Kuwait are likely to see higher growth in domestic demand and corporate earnings growth than elsewhere in the region, according to the report.  While Kuwait and Qatar offer above average dividend yields, the UAE currently trades on a 20% Price Earnings ratio discount to the region.

“Our preferred country exposure in the region is in these three markets, while on a sector perspective, banks, telecoms and real, estate are likely to be the biggest beneficiaries of the region’s growth,” said Mr. Garner.