Market traders have been caught off-guard since the beginning of last month.
Political turmoil in the Middle East and rising commodity prices have brought unwelcome memories from the end of 2008 when equities slumped and liquidity started to dry up.
Since the start of this year Saudi Arabia's market, the biggest in the Arab world, has shed 8.3 per cent of its value, while Dubai has lost 9.7 per cent and Kuwait has fallen almost 10 per cent. There have been losses in all regional markets.
The slide comes at a time when investors were already on the sidelines and the lack of liquidity plagued the Mena region markets.
The country's top chief executives from Shuaa Capital, Mena Corp (formerly known as Wafa Financial Services) and Gulfmena Alternative Investments discuss what lies ahead for equities:
q How will the unrest in the region affect foreign investor sentiment for the rest of this year?
Walid Shihabi, the chief executive of Shuaa Capital: Very significantly. Foreign institutional investors have been very conscious of risk profiles of regional economies and those associated with companies. This has been a key driver and any foreign institutions with limited risk appetite have left the market or reduced exposure. For them to reverse this position, there has to be an improvement in the geopolitical situation and that is yet to happen. Nobody has an outlook that is even medium term. It's very short term.
Fathi ben Grira, the chief executive of Mena Corp: For any investors to consider Mena as a region to invest in, the unrest will encourage them to cherry-pick stocks. I don't believe in those global regional funds that take all Mena markets as one. The situation is not the same with the UAE and Bahrain. You have stocks such as Arabtec that are clearly undervalued, that investors are looking at again.
Haissam Arabi, the chief executive of Gulfmena: In general, we are predominantly retail investors and these markets have not been relying on foreign investment. This is good news for us because the impact of less foreign investment is limited. The bad news is that foreign investment is seen as a catalyst. It excites market players and [if it leaves it] will have an intrinsic impact. Not all foreign investors are going to walk away but the idea that foreign investors distinguish between stable and unstable countries in the Middle East is wishful thinking. As a general rule, foreign investment at this point will be deterred from the Mena region. Nobody has so far bucked the trend. The issue is that the political risk premium is high and only getting higher.
q What country in the region offers the best investment opportunities, and why?
WS: It's difficult to say right now but the lowest risk profiles are the UAE and Qatar. If the primary drivers of unrest within the region are related to demographics and economic factors, the UAE and Qatar [markets look the safest]. They should be trading at a premium to other markets but there are other factors at play, and these relate to [low] liquidity flows.
FG: Definitely the UAE and Qatar. In the UAE you have several undervalued companies and the main problem we have today is liquidity of cash. The authorities have tried to address the issue by announcing new programmes of privatisation. I don't believe in that … it's not that we need more stocks on the market, we need more cash. If you want to attract foreign investors who produce the cash, you need to open up more restricted companies. Etisalat, for example, is only 25 per cent open to foreign investors. This will not attract them. Abu Dhabi emerged as a strong investment destination post-Dubai World and they need to capitalise on that and be more open to foreign investment.
HA: My favourite markets remain Saudi Arabia, Qatar and the UAE. The UAE is the [safe] haven. It is still struggling with real estate and that's affecting the prospect of companies, but stability here is a key selling point. My three favourites are Emaar, Drake & Scull and Arabtec. I would still stay clear of North Africa and the Levant because the political situation, or transition of government rule, is going to be turbulent. There are too many ifs.
q How long before regional markets are 'back to normal' or close to it?
WS:It depends on the political situation in the region. You need a sustained period of stability for this to happen. At best, the second quarter of 2011. We'll not see a lot of fresh money to funds dedicated to the Middle East.
FG: You have to remember the DFM [Dubai Financial Market] has [only been around for] 10 years. We have had crazy years in the past. Last year, the market collapsed totally in terms of volume, but sales of Rolls-Royce cars increased 200 per cent. So the cash is there … they're just sitting on it. The UAE is a cash-rich country but they don't know where to put that cash. We need to have a clear vision now. If the government takes the lead, the road [to recovery in the markets] can be quicker than expected.
HA: The [GCC] markets were geared to be the best performing because of government surpluses and the rise in oil prices. The markets [should be] up 20 or 30 per cent this year, similar to 2003-2004. Once we see there is stability, we should be looking at a very bullish fourth quarter.
q What type of stocks will perform best this year, and why?
WS: Events related to the Middle East and the Japanese earthquake will have the effect of derailing economic recovery. It is quite ominous for [stocks] broadly.
FG: I'd say regional stocks, and I'm talking about the UAE specifically. We haven't taken advantage of our close relationship with India. The day Arabtec looks at investing in India will be a great one for the company. India lacks the infrastructure and the UAE can offer that.
HA: Of course, I'm going to be biased towards equities. Globally, the petrochemical and fertilisers sectors will still outperform, particularly for Saudi Arabia and Qatar. It's also time for the banking sector to return.