After ten straight months of losses, the broad MENA market equity index registered a gain of 7.5% over March. Regional markets recovered some of their poise after a horrific 12 months as a combination of global and regional factors led to some optimism that the worst of the global financial crisis may be behind us and a period of recovery, albeit it a slow one, may be in front. The G20 US$1.1 trillion economic stimulus plan will further boost sentiment in the short term at least. Regional markets traded in tandem with other global markets as key equity markets such as the US, Europe and Hong Kong gained 8.5%, 4.8% and 6%, respectively, with even stronger gains in key emerging markets such as China and Brazil. Equally importantly, economically sensitive commodities and currencies - such as oil, copper, Australian and Canadian dollars - also posted strong gains over the month as the improved sentiment encouraged some risk-taking by global investors. As correlations between global and regional markets have been high during the brutal sell-off of the past 12-18 months, one can expect that a similarly high correlation will persist during the much hoped for stabilization and recovery stage.
Regionally, the focus was very much on official measures confront the effects of the global financial crisis. Investors in the UAE were heartened by clear signs of support from the Emirate of Abu Dhabi for its Dubai neighbor in the form of a US$10 billion subscription as part of Dubai’s recently launched US$20 billion bond program. This will go a long way towards meeting Dubai’s 2009 debt repayment schedule and ease the burden on governmental and quasi-governmental corporations. The Emirate of Abu Dhabi has also launched a total of US$3 billion in bonds, which were well received by the market with strong demand and improving prices and which also had the effect of reducing the quoted Credit Default Swap (CDS) on Dubai to around 6% after they had reached 10% earlier in the year. The State of Qatar also launched sovereign bonds for a total of US$2 billion in five- and ten-year maturities. These bond programs should be viewed as attempts by cash-rich sovereign issuers to open up new areas of funding for public and private corporations as other funding sources close up or become prohibitively expensive.
Going forward, close attention will be paid to the release of first-quarter 2009 earnings after a disastrous fourth quarter of 2008 led to combined losses of US$5.7 billion in GCC-listed companies, compared with profits of US$13 billion over the same period in 2007. The worst losses were recorded by financial institutions and the real estate sector, while the telecommunications sector was relatively unscathed and has posted small increases in profits over the past year.
Gains across the region were fairly uniform, with the exception of Oman which lost close to 5% over the month. The largest market, Saudi Arabia, gained 7% as optimism about banking sector profits and an improved oil price boosted sentiment. UAE markets gained close to 7% as local and foreign selling eased amidst improving credit and interbank deposit markets and official support from Abu Dhabi. Qatari equities gained 10% as firmer oil prices and the government’s plan to purchase the investment portfolios of banks boosted sentiment. The Kuwaiti market gained close to 5% despite lingering squabbles over the much-awaited economic stimulus plan. Outside the GCC, the Egyptian market gained close to 17% amidst improved emerging market sentiment and steadily falling interest rates in Egypt, giving a much-needed boost to domestic investment and spending.
Saudi Arabia
The largest MENA market posted gains of 7.28% during March, reducing year-to-date losses to around 2%. The market started off on a very weak footing as dismal global economic news depressed sentiment, taking the market to close to the 4000 level before a strong rally in the second half of the month ensured a positive finish to March. A rally in oil prices and progress by the Obama administration in the US in meeting the challenges facing the financial and auto sector boosted sentiment, as did the participation of King Abdullah bin Abdel Aziz in the G20 meetings. News that banking sector profits for the first two months of 2009 were SAR6 billion (US$1.6 billion) compared with SAR5.2 billion (US$1.39 billion) for the same period in 2008 was well received and indicated a recovery from the poor fourth quarter of 2008 for this vital sector. Heavyweight Rajhi Bank gained 10% over the month, while Saudi Fransi Bank and Arab National Bank gained 17% and 29%, respectively, and SAMBA and Riyad Bank made gains but underperformed their peers over the month. The petrochemical sector was also buoyed by the improved climate, with market leader SABIC gaining close to 12% while SIPCHEM and Sahara Petroleum gained 9% and 8%, respectively. Within the telecoms sector, an 11% gain by Saudi Telecom further boosted the market, while its main competitor, Etihad Etisalat, saw shares fall slightly during the month.
In terms of valuations, at close to 10 times forecast 2009 earnings, the Saudi market is trading at a small premium to its GCC peers, but we consider current valuations attractive as the macroeconomic outlook is stable, with low levels of debt and much less overhang from real estate and financial market excesses than many of its global and regional peers.
UAE
UAE markets followed up February’s gains with another gain of close to 7% in March, which has taken them to a small positive gain for the year. The attention of investors was very much focused on credit and interbank markets as official bodies in Dubai and Abu Dhabi announced several important initiatives to unlock the liquidity squeeze that is affecting the economy and investor confidence. Along with a marked improvement in global sentiment, these measures had the effect of bolstering investor sentiment and both UAE markets enjoyed a strong rally in the second half of March and first week of April. Good gains were seen in real estate and construction stocks, which recovered from deeply oversold levels earlier in the month and gains of 5%-10% were seen by shares of Arabtec, EMAAR and Aldar Properties, while heavyweight telecoms stock Etisalat gained close to 14% to take its 2009 performance to a gain of more than 30%. The banking sector was mixed, with large caps National Bank of Abu Dhabi and Emirates NBD ending March slightly lower while National Bank of Abu Dhabi, First Gulf Bank and Dubai Islamic Bank posted good gains.
In terms of valuations, at an estimated six times 2009 forecast earnings; UAE equities represent some of the best value regionally and globally. The recovery of the past several weeks has been slow and the markets have generally lagged their emerging market peers. Attention will be very much focused on progress made by the authorities in restructuring the balance sheets of major governmental corporations in Dubai. There have been some signs recently of local investors returning to the market, which will be critical in reviving the markets as the interest of foreign investors will be primarily focused on their own markets and more established emerging markets in Asia and Latin America at this stage of the cycle.
Kuwait
Despite continued legislative gridlock, the Kuwaiti equity market was able to make gains of close to 5% in March, reducing losses so far in 2009 to around 13%. The market made steady gains throughout the month as investors anticipated a government plan for banks to extend KWD4 billion (US$13 billion) in loans, of which it would guarantee half, to troubled sectors including the beleaguered investment sector. Earnings news for 2008 continues to make grim reading as National Industries Group announced a 2008 loss of KWD282 million (US$1 billion approximately), while Abyaar Real Estate Development Company announced a loss of KWD6 million after making a profit of KWD17 million in 2007. Amidst stricter disclosure rules, 39 companies who haven’t submitted their 2008 results will be suspended from trading.
The gains over the past month were driven by large cap stocks such as National Bank of Kuwait, Kuwait Finance House and Zain (a telecoms company), which gained between 10% and 15%.
Kuwaiti equities are currently trading at a small premium to the regional average and it is difficult to predict a trend for the market as there is poor visibility on the earnings front and legislative gridlock surrounding the government’s plans to extend aid to troubled sectors and the economy as a whole. The attention of investors remains focused on the investment sector and the progress of government plans in preventing defaults and bankruptcies which would have a ripple effect throughout the banking sector and the economy overall.
Qatar
Qatari equities rebounded from a very poor start to the year to gain 10% in March. Year-to-date, the market is still down close to 30%, making it the worst performing regional market over the first three months of 2009. Sentiment was boosted by a rally in oil prices and continuing government measures aimed at reinvigorating banking sector activity by recapitalizing banks and purchasing their investment portfolios. A successful bond issue by the State of Qatar was well received amidst hopes that the lingering liquidity crisis is being addressed.
The market rallied steadily over the month. Market leaders Industries Qatar and Qatar National Bank led the way with gains of 20%-25%, while Qatar Telecom posted a smaller gain of close to 5%. The real estate sector was also boosted by the improvement in sentiment and Ezdan gained close to 50%, reducing its losses so far in 2009 to around 5%.
Valuations in the Qatari market - at around 7.5 times 2009 forecast earnings and a dividend yield close to 8% - are attractive compared with regional peers. We are bullish on the prospects of the Qatari economy, with the International Monetary Fund projecting a 29% growth in gross domestic product for 2009, and view it as being well placed to meet the effects of the global financial crisis as huge gas reserves and accumulated surpluses give authorities ample room to support the financial sector and the economy during challenging times.
Oman
The smallest GCC market was weak over the month and failed to benefit from the improved global and regional sentiment. Losses of around 5% over the month have taken 2009 losses to close to 15%, making it the second worst performing regional equity market for 2009. The market is plagued by low liquidity and little investor interest and the government-sponsored Oman Stabilisation Fund has failed to spark a sustainable turnaround in market sentiment.
Market performance was very much affected by the 20% fall in the value of shares of Omantel over the month, a large portion of which was on the last trading day of the month as the company’s board appointed a new chief executive officer. Leading banking sector stock Bank Muscat provided some support as it gained close to 4%, while Oman International Bank and Bank Dhofar were relatively unchanged over the month. Outside the banking and telecoms sectors, Raysut Cement and Galfar Construction both lost ground while Oman Cable posted strong gains.
Valuations of the Omani market are in line with regional peers, but low levels of liquidity and a lack of sustained buying interest, despite government intervention through the Oman Stabilization Fund, is holding back any recovery. Further catalysts in the shape of positive earnings surprises or regional and foreign investor flows are needed to spark a revival in the market.
Egypt
The largest regional market outside the GCC enjoyed a very strong month and was the best performing market in the region with a gain of close to 17%, reducing its 2009 loss to under 9%. The catalyst for the revival was the much improved sentiment in global markets in general, and emerging markets specifically, with local investors joining foreign investors in buying up shares which had reached very attractive valuations after the huge losses of the past 12 months. Equally importantly, investors were encouraged by further reductions in interest rates by the Central Bank of Egypt to revive investment expenditure and consumption.
Leading stocks such as Orascom Telecom, EFG-Hermes and Orascom Construction made strong gains over the month and supported the market amidst signs of investor flows returning to this important emerging market. In the near term, the fortunes of the Egyptian market will depend to a large extent on the success of the Central Bank of Egypt in reducing interest rates to a level that will encourage investors and consumers while controlling the increasing fiscal deficit.
