In December, Shuaa Capital from Dubai expressed optimism about the markets in the UAE, Kuwait, and Oman, noting that Saudi Arabia is entering an accumulation phase. Meanwhile, Global Investment House, based in Kuwait, predicted over 25% growth in the equity markets of Kuwait, Saudi Arabia, and the UAE for 2007, with more moderate growth rates of 17% to 23% expected for Oman, Qatar, and Bahrain.
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| Dubai Equity Markets |
The Middle East research department of the Japanese financial services firm Nomura suggested that the markets are nearing the end of digesting last year’s excesses and are poised to bottom out soon.
Suffering Big Losses
Nomura analyst Tarek Fadlallah compared historical bull-bear swings in emerging markets and provided data showing that the previous bull runs in the Dubai Financial Market (DFM) and the Saudi Stock Exchange (SSE) were within the normal range of upturn phases seen in other regions, such as Asia and Eastern Europe, as well as on the Nasdaq. Typically, these upturn phases last an average of 31 months, ranging from 19 to 48 months.
However, the DFM and SSE corrections had not yet reached the maximum average loss of 80% experienced by emerging markets after bubbles burst. Additionally, the regional downturn periods were still shorter in November compared to other markets before they entered recovery phases with attractive gains.
Financial Analyses and Valuations
Analysts at Shuaa Capital and Global Investment House reported that price-to-earnings (P/E) ratios for GCC markets in 2006 ranged from 11 to 15 times earnings (Global) and 9 to 16 times (Shuaa). They noted that the Saudi Stock Exchange (SSE) had the highest P/E ratios, but even these were significantly lower than the almost 40 times earnings seen in the previous year. Global predicted that Saudi market P/E ratios had returned to levels attractive to long-term investors, although retail investors might still add volatility.
One stark example of the market correction in Saudi Arabia was the petrochemical giant Sabic, whose P/E ratio dropped from 40.1 to 13.4. According to Nomura, Sabic's market capitalization fell by around $130 billion from its peak in February 2006 to December, a loss comparable to the annual GDP of Singapore.
Market Resilience and Outlook
Despite the massive losses, analysts believe the downturn in GCC stock markets will not lead to macroeconomic crises, thanks to the region’s strong economic outlook and high liquidity, primarily due to oil revenues. Saudi Arabia, for example, reduced its public debt from over 100% of GDP a few years ago to around 28% in 2006.
Markets in the region are expected to rebound this year, with stock prices likely aligning with corporate earnings reports starting mid-January. Although major GCC corporations' respectable third-quarter 2006 results did not significantly shift market sentiment, the expectation is for a rebound aligned with corporate earnings.
Sector Analysis
Investors face challenges in 2007, needing to make informed decisions about buying and selling stocks. "Bottom-fishing" for low-priced stocks is seen as risky by some analysts due to the potential for premature buying. No sector is free from risks and downsides.
The finance and banking sector, the largest on GCC bourses, continues to show strong earnings outlooks, but faces increasing competition. In telecommunications, GCC-based players are well-positioned internationally, but share prices may not be enticing compared to global peers.
Real estate is expected to be the most closely watched sector in 2007. Analysts predict a correction in property prices due to supply-demand dynamics, but remain optimistic about a gentle deflation rather than a sharp crash. The second half of 2007 and 2008 will reveal important trends in property prices in Dubai and other GCC markets.
Regional Market Valuations and Risks
Market valuations in North Africa, particularly Morocco and Tunisia, are reaching bubble levels, cautioned Shuaa Capital. The Beirut Stock Exchange remains a wait-and-see situation due to ongoing instability in Lebanon.
The key question for regional equity markets is whether corporate earnings in 2006 will provide enough substance to encourage retail investors to make more fact-driven trading decisions. Global Investment House sees outward diversification as a stabilizing factor, highlighting Pakistan as a growth market where GCC investors are significant players. UAE investors are the second-largest source of foreign direct investment in Pakistan, accounting for 14% of all FDI, with Saudi banks and firms also expanding there.
Challenges and Future Outlook
Despite the correction phase nearing its end, GCC and Arab market risks persist due to structural and behavioral factors. High liquidity currently acts as a buffer against macroeconomic crises, but the absence of market makers, transparency, and effective regulation remains a challenge. Investor psychology and confidence are crucial, with markets still driven by emotions and fears. There is a need for better governance and transparency to make markets more rational and reliable, while still allowing for the excitement and unpredictability that drive stock market dynamics.
Published on Dubaitowa