Middle East market overview

Published June 8th, 2006 - 06:37 GMT

After the severe market corrections, the UAE market started off trading earlier this month in positive territory. The Dubai Financial Market ("DFM") benefited from weakening selling pressure, coupled with selective buying at reasonably attractive prices and the announcements of companies buying back shares, all resulting in the expectation of a relief rally. Before this thought could follow through, investors took an extremely short trading view, as speculators booked profits and smaller investors rushed into panic selling. As a result, the UAE markets were dragged to their lowest levels in many months, mostly harming the small investors who believed that the early rally was the beginning of a turnaround. Going forward, liquidity is still ample in the market, but is waiting on the sidelines for a clear trend to emerge. Current market conditions support institutional investors buying at current levels but smaller investors are advised to be wary of the fragile nature of the recovery.

 

In the long term, fundamentals remain generally positive as corporate announcements (such as plans to restructure Commercial Bank International into an Islamic bank and increase its capital by AED 520 million (USD 143 million) continue to point to a vigorous private sector and high liquidity levels.

 

In contrast to the UAE market, the Saudi Stock market started the month in negative territory despite good first quarter results reported by several leading firms. It continued on that note as it dropped to a 14 month low mid month, after which the head of the Capital Market Authority ("CMA") was replaced in an effort to improve sentiment as was the announcement of the privatization of the CMA and partial privatization of the Tadawul All Shares Exchange which were positioned as helping the stock market operate on more professional and transparent basis. In noteworthy corporate news, a cabinet statement stated earlier this month that the country will float 50% of its holding in Maaden at the end of 2006 and Saudi Arabian Basic Industries Corporation ("SABIC"), signed a deal to establish a USD 3.2 billion petrochemicals firm, 45% of which will be offered to the public. The IPO of Saudi Paper Manufacturing Company was covered six times during its ten-day subscription period, and other offerings such as Emaar Saudi Arabia are scheduled soon, encouraging investors to sell shares they currently hold.

 

Despite some exciting corporate news, the Saudi Stock Market is still expected to retain its volatility in the medium term as the lack of confidence from speculators and investors, as well as upcoming Initial Public Offerings ("IPO"), continues to pressure the market. Nevertheless fundamentals remain positive as the region will gain from the surging oil prices and budget surpluses due to accrue in the Gulf countries this year.  Although in negative territory, the Egyptian market is still attracting interest from regional and foreign investors. Companies are still announcing positive news, for example, EFG – Hermes was granted an investment banking license in Saudi Arabia which will aid in regional expansion and Orascom Construction Industries announced that it secured a USD 40 million contract for the construction work on a new cement production line in Libya. On the privatization front, 50% of Egypt's Alexandria Mineral Oil Company will be offered to prospective buyers starting the 21st of May and the subscription process for Egypt's third mobile license commenced with the bidding expected to start in July with a reserve price of USD 433.8 million.

 

The Beirut Stock Exchange is still looking robust as it is still 17% above its level at the beginning of the year. Similar to other markets in the region, companies continue to deliver positive news regarding earnings and growth. In addition, the long stagnant IPO market in Lebanon appears set to gain new vibrancy with one of Lebanon's top ten banks, the Lebanese Canadian Bank, announcing plans for a USD 100 million flotation. Similarly, after completing a USD 100 million capital increase measure, Credit Libanais, another one of Lebanon's top ten banks, is now planning to raise another USD 150 million in capital through an IPO. The long term outlook for Lebanon remains positive as valuations reach more reasonable levels, corporations continue to do well and liquidity remains abundant in the region.

 

The Omani market ended on a negative note this month, as the negative regional sentiment and redemption pressures from cross border funds finally caught up with it. The bearish trend in GCC bourses coupled with increasing deposit rates have negatively affected the Omani stock market. Nonetheless, analysts are confident that there is no need to panic, as almost all companies have performed well in the first quarter and earnings growth is expected to be strong in the coming months. The sell-off actually offers a good opportunity for investors to get into frontline stocks that are looking more attractive at current levels.

 

In conclusion, regional equity markets volatility remains high and prone to corrections. High quality blue chips with sustainable operating earnings and good cash dividend yields will begin to attract long term investor interest as valuations improve. Moreover, public and private sector liquidity levels remain high and will lend an element of support to regional markets but a very professional and selective approach is advised. (Rasmala Investments)


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