After an exciting end to 2007 December, traders entered the New Year eager for the release of fourth-quarter earnings results to provide short-term direction to the market. Global equity markets started the year in poor shape however and previously high-flying emerging markets in Asia and Latin America suffered as investors feared that the economic slowdown in the US, and ongoing credit market problems, would derail global economic growth.
Nevertheless, MENA markets gained as much as 6.5 per cent in the first two weeks of the month reaffirming their lack of correlation to other global capital markets. This ended abruptly however as investors were caught off guard with poor results from key companies in Saudi Arabia. This, combined with contagion forces from global equity markets, sent most MENA markets into a tail spin as foreign investors reduced their positions in some of the most popular and liquid regional stocks holdings to reduce exposure to emerging markets. Just as foreign fund flows seem to have been the catalyst for a strong fourth- quarter of 2007, local investors took their cue from the foreign funds and embarked on a panic and indiscriminate three day selling spree, leading to losses of 16 per cent between January 20th – 23rd.
The indiscriminate nature of the selling was highlighted by several companies declining by around 10 per cent after reporting healthy increases in their quarterly and yearly profits. The broad MENA market index ended the month just over 7 per cent lower which was only slightly better than the close to 8 per cent loss for the global market index. MENA market losses were driven by the 13 per cent loss in the Saudi market and 3 per cent loss in Egypt while the Kuwaiti market posted a solid 7.5 per cent gain for the month. These performances represent a short-term challenge to the notion that MENA markets are uncorrelated to global markets, particularly as the Saudi market, which is the least accessible market to foreign investors, was the worst affected. Nevertheless, we remain confident of the diversification benefits of our regional markets as the underlying fundamentals of these economies are very different from those of the economies of the US and Europe. We are of the view that January’s MENA market performance was primarily a case of a market in need for a correction after the very strong performance of the fourth-quarter of 2007. Nevertheless, it would seem that the increased attention, and investment, that the regional markets are getting from international investors is causing the correlations to rise from their present very low base.
In another important development, GCC Central Banks, as expected, followed the US Federal Reserve Bank’s aggressive interest rate reductions over the month. While this move has implications on the ongoing debate over the currency peg with the US Dollar, it is a supportive factor for equity markets and was an important factor in MENA markets recovering their balance and reducing their losses in the last week of January.
Saudi Arabia
After considerable gains of more than 60 per cent from their summer of 2007 lows, the Saudi equity market was long overdue a correction. Disappointing earnings from Saudi banks and market leader SABIC led to heavy selling pressure and a sizeable correction. It is difficult to point to contagion from the losses in global markets as a factor as the Saudi equity market is all but closed to direct investment from ex-GCC investors. We are therefore of the view that the losses in January are attributable to profit taking and a reminder that this market remains very volatile and susceptible to fickle domestic investor sentiment.
In corporate earnings, Saudi Telecom Co. (STC) announced a 2007 net profit of SAR 12 billion which represents a 6 per cent decrease over the same period in 2006. Saudi Basic Industries Corp. (SABIC) announced that its net profits for 2007 were SAR 27 billion, an increase of 33 per cent from 2006. However, investors were disappointed with SABIC’s fourth quarterly performance that resulted in only a 12 per cent increase in net profits compared to the same period last year. Almarai Co. Ltd. announced that its net profits for 2007 were SAR 667.3 million, a 43.6 per cent increase over 2006.
In corporate news, Savola Group acquired an additional 25 per cent stake in Egypt's New Marina for Plastic Industries raising its ownership to 95 per cent. The deal is estimated to be worth SAR 51.7 million. Also of note, Zain Saudi Arabia, the Kingdom’s third mobile service provider, announced its plans to raise SAR 7 billion via an initial public offering starting from 8th – 19th February 2008.
UAE
The Ministry of Economy reported that the UAE economy grew at a nominal 16.48 per cent for the year ending 2007 with GDP growing to AED 698 billion from AED 599.2 billion in 2006, thus making the UAE the second largest Arab economy. The UAE is expected to post another strong year of growth in 2008, primarily due to the rising non-oil segment of GDP. Non-oil nominal GDP growth has been averaging 16 per cent for the period 2002-2006 and is expected to increase to 21 per cent in 2008. This vigorous economic activity is expected to feed into corporate profit growth rates of 25-30 per cent on average thus making current equity market valuations reasonable.
The UAE equity market index (as measured by MSCI) lost just over 5 per cent for the month. These losses were primarily driven by equities listed on the DFM as the Abu Dhabi market was generally unchanged over the month. The difference in performances between the two bourses is attributable to the higher foreign presence in the DFM and resulting contagion from deep losses in other global equity markets. The Abu Dhabi market is also trading at lower valuations than its Dubai peer, thus limiting the downside during difficult market conditions.
Real Estate and Banking sector stocks remain attractive with profits of the banking sector having grown by around 30% in 2007 and lower interest rates will support the continued growth in both these vital sectors.
UAE - Dubai Financial Market (DFM)
After a very strong performance in December, the market registered small gains in the first two weeks of January with investors eagerly awaiting fourth-quarter 2007 corporate earnings. Concerns over the effect of the huge rally in the fourth-quarter of 2007 on valuations, combined with technically overbought conditions and negative sentiment in other emerging markets, led to heavy selling pressures in the latter half of January despite of strong earnings announced by front-line companies. The correction in the market was deep and painful as the index fell by more than 17 per cent in one trading week, before recovering towards the end of the month to end around 5 per cent lower.
In corporate earnings, Amlak Finance announced that its net profit grew by 131 per cent in 2007 to AED 301 million. DFM reported an increase of 76 per cent in its net profits for 2007 at AED 1.41 billion. Emaar Properties reported a 2007 net profit of AED 6.57 billion, a 3.2 per cent increase over the same period in 2006 beating analyst expectations. Arabtec announced a 127 per cent growth in net earnings for 2007 to AED 494 million up from AED 217 million in 2006. Mortgage provider Tamweel, announced a 194 per cent increase in its 2007 net earnings to AED 451 million up from AED 153 million in 2006.
In other corporate news, Arabtec Holding Co. announced that it has acquired a 55 per cent stake in a leading structural steel fabrication company – Gulf Steel Industries. Meanwhile, The Arabtec and Arabian Construction Company (ACC) joint venture was awarded a contract by Emaar IGO to begin construction at the Eighth Gate Development in Syria. The 20 year contract is valued at AED 152 million. The World Bank’s IFC is in talks with Amlak to acquire a minority stake in Amlak's fully-owned Egyptian unit, Amlak Finance and Real Estate Investment. Amlak Finance also announced that it signed a MoU with Qatar property developer, Barwa Real Estate Company, to facilitate its entry into the growing Qatari home finance market through a new entity called Amlak Barwa Finance.
UAE - Abu Dhabi Securities Market (ADSM)
After a strong December, investors started the New Year by extending the gains of last year with an 8.4 per cent return over the first two weeks of the month before succumbing to selling pressures and ending the month virtually unchanged.
In corporate results, National Bank of Umm Al Qaiwain announced that its full-year net profits reached AED 333.7 million, a 279 per cent rise compared to last year. Sharjah Islamic Bank announced a AED 301.8 million net profit for the year ending 2007, an increase of 50 per cent over the same period last year. Aldar Properties announced an increase of 55.4 per cent in its net earnings for 2007 to AED 1.94 billion up from AED 1.25 billion in 2006. Oasis Capital Company reported its full year 2007 net earnings at AED 170 million, an increase of 78.25 per cent over its full year earnings 2006.
Kuwait
The Kuwaiti market offered investors a safe-haven during January and was the only major market to record gains ending the month over 7 per cent higher. The market had lagged the rally in other GCC markets over the past few months and current valuations are more attractive than those of most other GCC markets. With the forecast strong growth in corporate earnings for 2008, the current price earnings ratio of around 14 times 2007 earnings is considered very attractive. The market also seems well insulated from the negative sentiment sweeping global markets as foreign fund flows are virtually absent from this market. The Kuwaiti economy is expected to have another good year in 2008 with 6 per cent growth in nominal GDP to US$ 116 billion. The majority of the growth is expected to come from the non-oil segment as the oil segment is expected to grow by only 2.4 per cent. Structural changes in the economy, such as the removal of the capital gains tax for stock market investments and reduction of corporate tax from 55-15 per cent for foreign owned businesses (yet to be approved by the Ruler), would be beneficial for the stock market and has been an important factor in the very recent strong performance.
In corporate earnings news, Mobile Telecommunications Co. (Zain) announced record consolidated revenues of KD 1.68 billion for 2007 and a milestone net income of KD 320.45 million, an increase of 11 per cent compared to the same period the year before. In other news, Agility entered into agreement to acquire Kenyan-based Starfreight Logistics Limited (an African procurement and goods and machinery clearing company). Agility has also entered into a joint venture with Abu Dhabi’s Mubadala Development Co. and Al-Bateen Investment Co. to create Agility Abu Dhabi, a company focused on providing integrated logistics services. Agility paid $80 million for a 36.5 per cent stake in the newly formed joint venture.
Qatar
Despite a strong start to the New Year, and an excellent earnings season for major banks and industrial companies, the Qatari equity market could not fully resist the negative sentiment in other regional and global markets and succumbed to bouts of heavy selling. The 1 per cent loss for the month was nevertheless much lower than larger losses in other regional markets.
In corporate earnings news, Gulf Cement Co. announced a net profit of QAR 32.3 million for 2007, which represents an increase of 63 per cent over the same period last year. The Commercial Bank of Qatar (CBQK) announced net profits of QR 1.39 billion, a 61 per cent increase over its net profit in 2006. Meanwhile, Qatar Islamic Bank announced a net profit of QAR 1.01 billion for 2007, a 24 per cent increase over its 2006 net profit. The earnings from major banks were generally strong with economic fundamentals supporting continued growth. In corporate news, Industries Qatar and Qatar Real Estate Investment Co. (Al Aqaria) announced the establishment of a new joint venture with authorised capital of QR 1 billion. The new entity will establish, manage, and buy and sell properties, including residential and commercial buildings.
Egypt
The Egyptian market has traditionally been the most correlated with global emerging markets and did indeed suffer bouts of selling amidst a global equity market sell-off. The Egyptian equity market closed lower by a little over 3 per cent as gains early in the month were reduced by the violent corrections in the latter half of the month. In corporate news, Orascom Telecom Holding (OTH) was granted the first commercial licence to provide mobile telephony services in the Democratic People’s Republic of Korea.
In important regulatory reforms, The Egyptian Insurance Supervisory Authority (EISA) will allow for the first time, the establishment of private companies that will be able to manage pensions and issue insurance certificates, manage private pension funds and establish funds for other companies. Additionally, the reformist government has indicated that a high-level committee at the Central Bank of Egypt is preparing the new plan for banking and financial reforms that will be launched in June 2008. Continued regulatory reforms and strong inflows from FDI and portfolio investments continue to make this an attractive market and it is important to note that despite losses over the month, its performance was far better than most other emerging markets.
