Global equity markets witnessed one of the most rapid and severe corrections on record during the month of August, as global fund managers readjusted their portfolios in light of the US sub-prime mortgage crisis and the resultant credit squeeze. The panic and massive flight to quality particularly affected previously high-flying emerging markets in Asia and beyond with escalating fears that this would spill over into the regional equity markets.
August’s market moves re-affirmed the MENA equity market’s low correlations with other global financial markets and their role as a useful diversifier in global equity portfolios. Regional markets across the MENA region exhibited a large dispersion in performances, thus reinstating their self-contained diversification to investors at large. The Egyptian, and increasingly, the UAE equity markets, which both have a relatively large presence of foreign institutional investors, were the only markets affected by the global crisis. Nethertheless, the effects were relatively short-lived and contained, particularly in the case of the UAE. The Saudi market was totally unaffected and was one of the best performing markets in the world for the second consecutive month, erasing losses from the first-half of the year to finally move into positive territory, leaving only Lebanon with a negative year-to-date return amongst MENA equity markets.
Persistently high oil prices continue to ensure a high rate of nominal GDP growth in the GCC region, but escalating inflationary pressures are putting pressure on real growth rates. It is expected that the real GDP growth within the GCC will moderate from the very high pace seen in the past few years. This is not expected to have any major impact on the region's economic activity, as the huge fiscal surpluses accumulated over the past few years will serve as an effective cushion against any relative slow down in GDP growth or adverse effects from global capital markets.
The Saudi market traded in positive territory throughout the month of August extending its July rally to post gains of over 9% for the second consecutive month, and ending the month with a 4% gain for the year. In light of the traditionally slow summer period, trading volumes were moderate but reasonable. In addition, three new insurance companies were listed during the month and traded higher at substantial premiums to the listing price boosting sentiment and trading volumes.
The Saudi market is now trading at around 16.75 times earnings, re-establishing its premium over regional peers as the recent strong performance removed some of the undervaluation that was prevalent throughout the past six months. In addition, indications of corporate profit growth of around 3% in the first-half of 2007 over the same period last year did not compare well with regional peers, but favorable momentum and high levels of liquidity will continue to make this market attractive in the medium-term.
In corporate news, SABIC received an approval to acquire GE plastics in a US$ 11.6 billion deal. Despite initial worries over the financing of the transaction as a result of the global liquidity squeeze, it would seem that SABIC has now been able to restructure the financing package to ensure that the transaction is executed.
Saudi Telecom announced a deal with China’s Huawei Technologies Ltd to design and deploy WiMax based networks across major cities. Saudi Telecom has also indicated that they intend to bid for a stake in the third mobile license in Kuwait in order to further diversify its revenue stream and re-invigorate its profit growth.
UAE - Dubai Financial Market (DFM)
The Dubai Financial Market witnessed a large increase in trading volume of around 20%, ending the highly volatile month of August with a marginal loss. Emaar was once again in the spotlight following its disclosures of its US operations, having been negatively impacted by the US sub-prime mortgage crisis. This combined with the global market panic, erased 8% from the DFM over six trading days, and Emaar properties traded at it lowest levels in two years, with many other stocks trading sharply lower as negative sentiment took over. Nethertheless, the announcement regarding the cancellation of Emaar’s land-share swap deal with Dubai Holdings resulted in a sharp market recovery from oversold positions to end the month with only a marginal loss. The market is currently trading is just over 12 times earnings, which is a heavy discount from its emerging market peers, thus making it an attractive investment venue for regional and global investors.
A relaxation of the requirements for family owned businesses to take a portion of their companies’ public will add more depth to UAE bourses and re-invigorate the IPO calendar which in turn will boost the bottom lines for commercial and investment banks.
In corporate earnings news, the National Bank of Dubai (NBD) announced a 41% increase in second quarter profits to AED 349.2 million while, Emirates Bank International reported an increase of 23.6% in first-half profits. Gulf Navigation Holding more than doubled its first-half net profits to AED 47.7 million, while mortgage provider Tamweel announced a 118% jump in its first-half net profits.
UAE - Abu Dhabi Securities Market (ADSM)
The Abu Dhabi market followed its Dubai peer and traded in a narrow range at the beginning of the month, before plunging lower in the middle of the month as it succumbed to the spill-over from the global market crisis, before recovering towards the end of the month with a marginal loss of 1.25%. This was nevertheless its third negative month in a row despite a very strong first-half of the year. Current valuations of just under 13 times earnings and strong corporate profit growth on the back of aggressive private and public investment expenditure are making this market attractive, and providing investors with an attractive entry point.
In corporate results news, TAQA announced an increase of 26% in first-half net profits to AED 249 million, while Sorouh Real Estate Company reported a net profit of AED 442.9 million for the second quarter, against a net loss of AED 40 million for the same period in 2006.
In other corporate news, Dana Gas announced its discovery of gas in Egypt, with production now scheduled to commence in November of this year. Sorouh Real Estate Company has made strategic investments in a major development in Morocco, whilst TAQA acquired the Canadian oil and petroleum company Pioneer Canada in a US$ 540 million deal.
The Kuwaiti market continued its march ahead with gains of just over 1% during August. Its seventh positive month in a row now takes its year-to-date gains to 26%; nevertheless it surrendered its top performing regional ranking to Morocco which closed at a 6% gain for the month. The Kuwaiti market remained range-bound in the earlier parts of the month before breaking out into positive territory towards the end of the month. Trading activity was relatively light as the markets strong run, and the traditionally slow summer period led to something of a “wait and see” pose by investors.
In key corporate news, Wataniya Telecom reported a 3% increase in second quarter net profits to KWD 18 million, while Kuwait Finance House reported a 55.5% increase in second quarter net profits over the same period of last year.
In other corporate news, National Bank of Kuwait (NBK) acquired a further 10% in International Bank of Kuwait raising its stake in the bank to 30%, while MTC announced that it would invest US$ 482 million in Congo Brazzaville in the next five years.
The Qatari market broke its four month winning streak ending the month with a marginal loss of under 2%. Trading activity was substantially lower with volumes reduced by more than 50%. Qatar has nevertheless recovered very well from its oversold position from earlier in the year, and is now showing a year-to-date return of around 5%.
Corporate results for the second quarter of 2007 have been strong, with earnings of listed companies growing by 35%, therefore keeping current valuations attractive.
In corporate results news, Qatar Telecom reported an increase of 14.6% in its second quarter net profits to QAR 485.7 million from QAR 423.6 million a year earlier, while Qatar Industries reported an increase of 28% in its first-half profits to QAR 2.05 billion, and Qatar Islamic Bank announced a 6.4% rise in the net profits for the first-half of 2007 over the previous year.
The Egyptian market broke its four month rally as foreign institutional investors reduced their holding across all equity markets, particularly emerging equity markets, in response to the fall out from the US sub-prime mortgage crisis. Regionally, the Egyptian market has borne the brunt of the global crisis, while the Moroccan market has somewhat surprisingly escaped the sell-off and posted good gains for the month. The heavy foreign selling in the Egyptian market led to a 36% increase in trading activity on the Cairo Stock Exchange despite the traditionally slow summer period. With the 6.26% decline in August, and the solid growth in earnings for the first-half of 2007, Egyptian equities are trading at 16.7 times earnings which is lower than its historical averages, and compares reasonably well with other emerging markets.
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